Co-insurance is an industry-wide property provision that states the amount of coverage that must be maintained as a percentage of the total value of the property at the time of loss. The penalty is based on a percentage stated within the policy and the amount reported. Common co-insurance are 80, 90 or 100% (the higher the percentage is, the worse it is for you) of the value of the insured property. It is important to note, here at NREIG we have no co-insurance, provided you are insured to $50 per square foot or higher. Let’s discuss an example of how a co-insurance penalty could be assessed in the event a loss occurs and you are deemed to be underinsured.
How Co-Insurance Works
Let’s say a house insured for $100,000 sustains a loss of $40,000 and carries a $3,000 deductible. The claims adjuster determines how much the property would cost to rebuild if the location had been a total loss. In this example, let’s say they determine it would cost $250,000 to rebuild. Then they refer to the declarations pages of your policy and see you have an 80% coinsurance clause on your policy. Meaning you agree, when entering into this agreement with your carrier, to be insured to 80% of the true replacement cost of the policy just determined to be $250,000. Provided you are carrying $200,000 or more of building coverage (80% of $250,000), you have met your co-insurance clause. However, if you are insured to $199,999 or less, you will be assessed a co-insurance penalty based on the percentage you are underinsured (50%). This is done prior to figuring in the depreciation and the deductible (so they can take the percentage off of the larger amount). This will reduce your claim amount to $20,000 (50% of $40,000), less your deductible, meaning the insurance company will pay no more than $17,000 on your $40,000 in damage.
If you are looking at your declarations pages and scratching your head as to why you are insuring your 1,000 square foot home for $150,000, look no further than your co-insurance clause. Many carriers (in an attempt to avoid a co-insurance penalty in the event of a loss), greatly inflate the ITV (Insurance to Value) of the property. The last thing your agent wants is you in their office upset after a loss occurs because in addition to being hit with depreciation, you are also being hit with a co-insurance penalty. So the better alternative is to charge you a higher premium for more coverage than you will ever recover in the event of a loss.
NREIG works with you to determine what valuation per square foot you want to be insured to. We provide you with Actual Cash Value coverage and NO co-insurance beginning at $50 per square foot. Replacement Cost with NO co-insurance begins at $70 per square foot.
Please keep in mind, NREIG is willing to provide you with a full policy/coverage comparison of what you currently carry and what NREIG can provide.