Insurance spreads the risk of loss among every policyholder and the insurance company.
The “coinsurance clause” in a Business Property policy reflects the fact that the coverage divides this risk by setting premiums based primarily on the value of the property. Those who insure their property for less than its actual cash value (ACV) or replacement cost will have to pay the uninsured portion of any covered loss out of their own pocket — in other words, “coinsuring” the risk — which encourages policyholders to buy coverage for the full value of their property.
The coinsurance clause usually requires policyholders to insure their property for 80% of its ACV. For example, if the property of your business is worth $500,000, you would need to purchase a $400,000 policy. If a fire caused $300,000 worth of damage, the insurance company would pay $240,000 (80% of $300,000), leaving you to pick up the other $60,000. However, if you had purchased the full $500,000 in ACV coverage — paying a higher premium — the insurer would cover the entire $300,000 claim.
We’d be happy to discuss the benefits that the coinsurance clause offers. Feel free to give us a call.