Guest Blogger: Tim Ball, Ball & Boyd Public Adjusters, Inc.
CO-Insurance by Tim Ball
As public adjusters dealing with commercial businesses statewide, we were asked to write a brief on a topic of our choice that would benefit the visitors of the Commercial Realty Advisor’s website. We have chosen CO-INSURANCE.
We have been handling claims and representing home and business owners since 1989. An issue that often confuses insured holding commercial policies is CO-INSURANCE. This is a term for a common policy condition that the insured not only doesn’t understand, but most of the time doesn’t know the condition is in the policy at all. It is used primarily to lower premiums, but the insured doesn’t realize it is usually lowering coverage!
I could hold a day-long seminar on the issue, but will keep the explanation as simple as possible. When reviewing the Policy Declarations or Cover Page, when the word “Co-Insurance” appears, there will be a percentage next to it, usually 80%, 90%, or 100%. Essentially, the percentage noted is defining what the stated COVERAGE AMOUNT is supposed to represent in terms of that same percentage of the VALUE of the property. For example, a policy showing $100,000.00 coverage at 80% co-insurance means that the insured is stating (or agreeing) that $100,000.00 is, in fact, 80% of the value of the property. So…if the value of the property is $125,000.00, they are IN COMPLIANCE with the condition of co-insurance. Here’s the math…$125,000.00 x 80% = $100,000.00, and $100,000.00 is the amount of coverage, so everything is OK.
A more typical example is when we know the value of the property is $200,000.00, yet the policy is written for $100,000.00 at 80% co-insurance. If the value is $200,000.00, then we multiply that by the 80% to determine that the amount of COVERAGE SHOULD BE $160,000.00. Because the written coverage is $100,000, and due to the co-insurance clause should be $160,000.00, now the insured can only recover 100/160 of the calculated damages. They will ONLY COLLECT 63% OF THE AGREED AMOUNT OF DAMAGE; this is discussed in terms of a 37% CO-INSURANCE PENALTY. If the co-insurance percentage is 90% or 100%, the penalty would be even greater.
“VALUE” is either the Replacement Cost (RC) or Actual Cash Value (ACV) of the property, depending on whether it’s a RC or ACV POLICY. It has nothing to do with Market Value; it’s about the estimated cost of reconstruction. If the example above with the 200K value is to be examined on an ACV basis, we would do the following: Start with 200K, subtract the estimated depreciation on the property, let’s say 15%, which now puts the VALUE (ACV) at 170K. Multiply 170K x 80% = $136,000.00, and now the insured can recover 100/136 of the calculated ACV damages or 74%, suffering only a 26% penalty. It looks like you would be better off with an ACV policy, but that’s only when the amount of coverage is so far off that a significant penalty applies so attempting to reduce the penalty becomes the goal.
Co-Insurance can apply to Buildings, Business Personal Property, and even Business Interruption.
Remember, it’s all about the amount of COVERAGE you SHOULD HAVE, and what percentage of that the actual amount of coverage represents.
If a policy has the two MAGIC WORDS “AGREED VALUE”, then the co-insurance DOESN’T APPLY AT ALL even though it appears it does.
Anyone can feel free to call anytime with questions. We represent the public, so we’re happy to help in any way we can.
When someone thinks they might have an insurance claim, they should CALL US FIRST!
Timothy Ball is a Principal at Ball & Boyd Public Adjusters, Inc. You can reach him at:
Timothy M. Ball
Ball & Boyd Public Adjusters, Inc.
237 Route 149
P.O. Box 1556
Marstons Mills, MA 02648
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