When unforeseen disaster strikes, business owners expect their commercial property insurance to cover the damages. However, many are caught off guard by a coinsurance clause that can significantly reduce their payout.
Understanding how this clause works can prevent costly surprises and ensure full coverage when you need it most. This blog will help break down the key components of coinsurance, how it affects claims, and what business owners can do to avoid abrupt financial strain.
Table of Contents
- What Is a Coinsurance Clause in Commercial Property Insurance?
- How Does the Coinsurance Clause Affect Your Insurance Payout?
- What Are the Penalties for Underinsuring Your Property?
- How Do You Calculate the Correct Coinsurance Coverage?
- What Are Some Real-World Examples of Coinsurance Penalties?
- Coverage Gaps Can Cost You—Biscayne Risk Helps You Stay Protected
What Is a Coinsurance Clause in Commercial Property Insurance?
A coinsurance clause is a policy provision requiring business owners to insure their property to a specific percentage of its value—typically 80%, 90%, or 100%.
If the insured amount is below this requirement, a penalty is applied to claims, reducing the payout. This clause is common in commercial property insurance and ensures policyholders maintain adequate coverage to protect against substantial financial losses.
There have been many instances where policyholders mistakenly believe they can insure their property for less than its full value to save on premiums. However, doing so can lead to a significant financial shortfall when a claim is filed.
The coinsurance clause exists to ensure policyholders maintain adequate coverage, protecting both their insurer and insured from losses due to underinsurance.
How Does the Coinsurance Clause Affect Your Insurance Payout?
If your commercial property is underinsured, a formula to determine the payout amount is applied. This calculation often results in reduced compensation, leaving businesses to cover a larger portion of the damages.
Here’s how it works:
- Insured value / Required coverage amount = Coverage percentage
- Claim amount x Coverage percentage = Final payout amount
For example, if a policy requires 80% coverage of a building value, but the insured amount is only 60%, the insurer will only pay 75% of the claim instead of the full amount.
Calculating the true cost of commercial property insurance goes beyond just premiums—it includes ensuring you have the right coverage to avoid penalties and financial loss.
What Are the Penalties for Underinsuring Your Property?
Underinsuring your property can lead to several financial consequences, such as:
- Reduced claim payouts: You will receive only a fraction of the total claim amount.
- Unexpected out-of-pocket costs: Business owners must pay the difference between the insured amount and the required coinsurance percentage.
- Risk of policy non-renewal: Insurers may refuse to renew commercial property policies with a history of underinsurance.
The issue of underinsurance is widespread, with a recent study revealing that only 43% of business owners have increased their policy limits to accurately reflect current replacement costs.
This highlights the prevalence of the problem and the potential for significant financial repercussions.
How Do You Calculate the Correct Coinsurance Coverage?
To avoid penalties and unexpected losses, business owners must determine the appropriate level of insurance coverage. Follow these steps:
- Assess the property’s replacement cost: Use an up-to-date valuation to determine the true cost of rebuilding or replacing the property.
- Check the coinsurance requirement: Diligently review your policy to confirm the required percentage.
- Calculate the minimum required coverage: Multiply the replacement cost by the coinsurance percentage to determine the minimum coverage needed.
- Adjust coverage as needed: If your policy falls below the required amount, ensure to increase coverage to avoid penalties and financial gaps.
Insurance needs can change over time due to property improvements, inflation, and changes in market value. Regular assessments ensure that your policy remains in line with these shifts and provides adequate protection over the years.
What Are Some Real-World Examples of Coinsurance Penalties?
Research shows that 67% of claims managers have been forced to reduce or reject claims in the last year due to underinsurance.
These real-life scenarios help highlight the risks of underinsuring property.
Case Study #1 – A business owner insures a $2 million building for only $1.2 million with a 90% coinsurance clause. A fire causes $500,000 in damage, but the insurer only pays $333,000 due to underinsurance. The owner must cover the remaining $167,000.
Case Study #2: – A retail store experiences flood damage, but because their insurance coverage is only 70% of the required amount, their payout is cut by 30%, leading to unexpected repair costs that significantly impact their ability to reopen quickly.
Hoping for the best is essential, but preparing for the worst is what ensures long-term security. Staying proactive on how the coinsurance clause works can mean the difference between a smooth recovery and an overwhelming financial burden.
Coverage Gaps Can Cost You—Biscayne Risk Helps You Stay Protected
The coinsurance clause can significantly impact your commercial property insurance claims. Understanding the requirements, penalties, and coverage calculations helps you avoid potential financial losses. With the help of our innovative insurance experts, you can ensure your business is fully protected and avoids costly claim reductions. Contact us today to learn more about our personalized insurance solutions and how we can help navigate you through your policy.