Has your insurance broker ever used the term “co-insurance clause”? It’s a part of most insurance policies that you purchase so it is important to understand exactly what it is.
On most commercial policies you will see it declared on the policy documents what the co-insurance clause percentage is. The co- insurance clause is typically 80% ,90% or 100% of the full replacement cost.
Many commercial properties do not have adequate insurance coverage on their buildings, contents, stock and equipment so when a claim happens, it can get very complicated. The property needs to be insured to at least the co-insurance percentage or else in the event of a partial loss claim penalties will incur and in the event of a total loss there will be a shortfall.
For example, a building valued at $1,000,000 Replacement Cost with a co-insurance clause of 90% must be insured to no less that $900,000. If you chose to insure for less than the amount required by the co-insurance clause, you are essentially agreeing to retain part of the risk. The insure company is going to look at what amount you insured your property for, what it should have been insured for, what the loss is and then use this formula to determine what you get paid out. In this case, if not within the 90% you would not get a full payout in a partial loss.
This clause is imposed by insurance providers to encourage policy holders to carry a limit of insurance that is equal to the value of property being insured or at least equal to a specified percentage of the value of the property. Co-insurance is an important discussion to have with your broker prior to a claim so that there are no surprises when it comes to a settlement.