If tangible property is an integral part of business operations, understanding the co-insurance clause in property insurance is important to ensure that, in the event of a total-loss, a claim payout will be equivalent to your purchased limits. This applies to a variety of property policies and adhering to the co-insurance clause is beneficial for both the carrier and the insured. It is important to note, the value used when making this assessment is the replacement value, not the market value that real estate agents use when selling a property.
When carriers insure buildings and other property types, they prefer the limits on the policy to nearly match the value of the property. In order to ensure this occurs, the carrier will include a co-insurance clause which mandates that the property be insured to a certain percentage of the replacement value, usually between 80% and 100%. If the insured does not honor this clause, in the event of a loss, the claim funds he or she is to receive will be penalized on a pro-rated basis, based on the percentage of actual insured limits vs. required insurance limits.
For example: An insured has a building worth $100,000 and is required to insure it for 100% of the value, but only insures it for 75% of the value. If he has a total-loss claim, instead of receiving $100,000, he will only receive $75,000 in claim funds. Another example would be the cars insured under a dealers open lot policy. If a dealer has $500,000 dollars in cars and is required to co-insure at 80%, but only insures up to $300,000, instead of receiving $300,000 in fund money, he will only receive $180,000.
A co-insurance clause can apply to a variety of property policies. Buildings for owner occupied and lessors risk policies, Cars for Dealer Open Lot policies, and Business Personal Property limits if it is a significant amount are good examples of where a co-Insurance clause can apply. Be sure to take this into account when deciding what limits to set when you are binding your insurance and be sure to follow insurance policy guidelines when choosing property limits. If you need assistance, be sure to reach out to Beckerman to review your policy.