In our previous article, we talked about coinsurance, which is found in almost all commercial property policies. Before that, we discussed insurance to value, which became more important during COVID due to rising building material and labor costs. If we’re not careful, we could end up sharing the cost of a loss as a coinsurer—not a good thing! So, how do we avoid this?

Here are three ways to handle coinsurance:

Inflation Guard Endorsement: This option increases your coverage by a percentage, typically 2-3% per quarter, to keep up with inflation. Many insurers, including Sentry, offer different percentage and time options. While this helps, it doesn’t eliminate coinsurance entirely.

Agreed Amount Endorsement: With this option, you and your insurer agree on the value of your property annually using a “Statement of Values” form. This endorsement suspends coinsurance for that policy period, meaning you won’t be affected by coinsurance in the event of a loss, as long as your values are accurate.

Reporting Form Option: This applies to things like business property, inventory, and work in process, but not building coverage. You report the value of your property on a monthly or quarterly basis, paying only for the coverage you need. However, reports must be timely and accurate. If no one on your team can handle the reporting, this may not be the best choice.

By working with your agent or broker to choose the right option, you can avoid costly surprises related to coinsurance in the event of a property loss.

Next, we’ll shift to another topic—one of my favorite exposures. Stay tuned!
If you have any questions, contact Tom at Tom.F.Franzen@gmail.com.

Tom Franzen is the retained Insurance/Risk Management Consultant for FEMA Services, Inc. With 45 years in the insurance industry, Franzen has experience on both the company and agency sides of the business.

Coinsurance can be confusing, even for some insurance professionals. But don’t worry, we’ll break it down simply.

What is Coinsurance? Coinsurance has been around for ages. It’s a way to ensure that insurance premiums are fair and sufficient to cover property losses.

Why Coinsurance? Most property losses (from wind, hail, fire, etc.) aren’t total losses. Because of this, some people think they only need enough coverage for these partial losses. However, insurance relies on many people paying premiums to cover the few who experience losses. This is where coinsurance comes in to make sure there’s enough money to cover claims.

How Does Coinsurance Work? Let’s talk about buildings and business personal property, covered on a replacement cost basis. Coinsurance is usually set at 80% or 90%, though 100% is also available but risky. Here’s an example:
• If your building’s replacement cost is $1,000,000, with 80% coinsurance, you must carry at least $800,000 in coverage.
• With 90% coinsurance, you need $900,000 in coverage.

In essence, you and the insurance company share the risk. The insurer covers $800,000, and you agree to cover the remaining $200,000.

Coinsurance at the Time of Loss: Coinsurance is calculated when you make a claim. For example, if you have $800,000 in coverage on a $1,000,000 building with 80% coinsurance, it seems fine. However, if you experience a loss after significant inflation and cost increases, your coverage might fall short, creating a coinsurance issue.

Key Formula: The coinsurance formula is simple: “Did” (the amount you carry) over “Should Have” (the amount you should have carried). If you have $400,000 in coverage on a $1,000,000 building with an 80% coinsurance clause, you should have carried $800,000. Since you didn’t, you’ll only be paid for 50% of your claim.

How to Avoid Issues: To avoid coinsurance problems, you can use inflation guard coverage and agreed value endorsements, which we’ll cover in the next article. It’s crucial to discuss insurance values and coinsurance with your agent or broker. If they don’t review these details with you, consider finding a new one.

If you have any questions, contact Tom at Tom.F.Franzen@gmail.com.

Tom Franzen is the retained Insurance/Risk Management Consultant for FEMA Services, Inc. With 45 years in the insurance industry, Franzen has experience on both the company and agency sides of the business.