Co-insurance is a common concept in commercial property insurance policies. It’s an important aspect of insurance policies that can have a significant impact on the amount of a claim that a policyholder is able to recover. In this blog, we’ll discuss what co-insurance is and how it applies to commercial property claims.
What is Co-insurance?
Co-insurance is a term that refers to the percentage of an insured property’s value that the policyholder must insure in order to be fully covered in the event of a loss. It’s essentially a requirement that policyholders insure their property for a certain percentage of its value, typically 80% or 90%. If the policyholder fails to meet this requirement and the property suffers a loss, the insurer may reduce the amount of the claim payout by the same percentage that the policyholder was underinsured.
How Co-insurance Works in a Commercial Property Claim
Co-insurance applies to commercial property insurance policies in the same way that it applies to other types of insurance policies. In a commercial property insurance policy, the policyholder is required to insure their property for a certain percentage of its value, typically 80% or 90%. If the policyholder fails to meet this requirement, they are said to be underinsured.
When a loss occurs, the insurance company will calculate the amount of the loss and compare it to the insured value of the property. If the policyholder has met the co-insurance requirement and insured the property for the required percentage of its value, the insurance company will pay the full amount of the claim, up to the policy limits.
What if you’re Underinsured?
However, if the policyholder is underinsured, the insurance company will apply the co-insurance formula to the claim payout. The co-insurance formula is used to determine the amount of the claim payout. This is based on the percentage of the property’s value that was insured. In its simplest form, the co-insurance formula is the amount of insurance carried on the property divided by the amount of insurance required, multiplied by the amount of the loss. For example, if the policyholder insured the property for only 70% of its value, the insurance company would reduce the claim payout by the same percentage, paying out only 70% of the claim.
Let’s say a commercial building has a value of $1 million and the policyholder insured the property for only $600,000. Assume the insured is required to insure the property for 80% of the replacement value and the building suffers a loss that results in $500,000 in damages. Then the insurance company will use the co-insurance formula to determine the amount of the claim payout. In this case, the claim payout would be reduced by the same percentage that the property was underinsured, which is 25%. Therefore, the policyholder would only receive a claim payout of $375,000, or 75% of the total amount of the loss.
Why Co-insurance is Important in Commercial Property Claims
Co-insurance is an important aspect of commercial property insurance policies because it helps ensure that policyholders are properly insuring their property. The co-insurance requirement is intended to prevent policyholders from underinsuring their property in order to save on insurance premiums.
Co-insurance can also have a significant impact on the amount of a claim payout in the event of a loss. If a policyholder is underinsured and suffers a loss, they may not receive the full amount of the claim payout that they expected. This can result in significant financial losses for the policyholder. And that’s why it’s important to properly insure commercial property and meet the co-insurance requirement.
In conclusion, co-insurance is an important aspect of commercial property insurance policies. It requires policyholders to insure their property for a certain percentage of its value, typically 80% or 90%. If a policyholder is underinsured and suffers a loss, the insurance company may reduce the amount of the claim payout by the same percentage that the policyholder was underinsured.
Contact Clarke & Cohen, Bala Cynwyd, PA Public Adjusters, in case of a commercial property insurance claim.