Adequately protecting your investment properties requires more than just purchasing an insurance policy; it involves understanding the key factors, like coinsurance, that can severely impact your coverage and payouts. Coinsurance is an industry-wide property provision that requires you to insure your property to a certain percentage of its total value, typically 80%, 90%, or 100%. If you do not meet this requirement at the time of loss, you could face penalties, which means you might not receive the full amount you expect from a claim. Coinsurance is intended to prevent the underinsuring of properties.
For Example…
Let’s say you have an investment property insured for $100,000 with a $3,000 deductible. The property experiences a $40,000 loss, so you file a claim with your insurance carrier. Any time you file a claim, an adjuster will visit the property, and part of their responsibility is to determine how much it would cost to rebuild the property if it had been a total loss.
For this example, we’ll say the adjuster determines that the cost to rebuild is $250,000. After referring to the declarations page of your policy, the adjuster sees you have an 80% coinsurance clause, meaning when you entered into this policy agreement with the carrier, you agreed the property would be insured to 80% of the true replacement cost. Had you been carrying $200,000 or more of building coverage (80% of $250,000), you would have met your coinsurance clause. However, as you are only insured to $100,000, you will be assessed a coinsurance penalty based on the percentage you are underinsured (in this scenario, 50%).
This penalty is incurred prior to figuring in the deductible and depreciation. So, in this scenario, the coinsurance penalty would reduce your claim amount to $20,000 minus your $3,000 deductible. So, your insurance carrier would pay out no more than $17,000 for your $40,000 loss.
Avoiding Coinsurance Pitfalls
If you’ve ever read through your declarations page and wondered why you are insuring your 1,000-square-foot home for $200,000, the answer typically lies within the coinsurance clause. In an attempt to avoid coinsurance penalties in the event of a loss, many insurance carriers will inflate the Insurance to Value (ITV) of your property. They often do so to prevent situations in which clients, already dealing with the stress of a loss, aren’t further burdened by penalties for underinsurance. The unfortunate reality is that this can lead to you paying higher premiums for coverage levels you may never need to claim.
At National Real Estate Insurance Group, we take a different approach. We work closely with each investor to determine a fair valuation per square foot for the property, ensuring coverage needs are met without unnecessary costs. We offer Actual Cash Value (ACV) coverage with no coinsurance starting at $75 per square foot. If you’re looking for more comprehensive coverage, our Replacement Cost (RC) option begins at $120 per square foot, also without coinsurance.
Why Choose NREIG?
Choosing NREIG means peace of mind. Our no-coinsurance policies are designed to protect you from unexpected penalties without overpaying for coverage. With flexible coverage options and a team of experts dedicated to helping you navigate the complexities of insurance, NREIG supports you in every step of your investment journey.
