What's New at Payne Insurance Agency

Wednesday, June 23, 2010

Co-Insurance Penalty Clause

Does your policy have a Co-Insurance Penalty Clause?  Most policies do.  The Co-Insurance clause under most policies states that your building must be insured for at least 80% of the replacement cost.  If your building is not insured for at least 80% then you are penalized if you have a large enough claim.

Here's how it works:

Let's say you have a building that you believe would cost $100,000 to replace and a coinsurance penalty in your policy of 80 percent. You insure the building for $80,000 thinking you have fulfilled the coinsurance clause. A fire loss causes $60,000 worth of damage so you submit a claim. Your insurance company subsequently determines that the replacement cost of the building is actually $150,000.

To determine how much to pay on the claim, the insurer divides the amount of insurance you purchased ($80,000) by the amount you should have purchased (80% of $150,000 or $120,000). The result (two-thirds) or $40,000 is the amount of your claim the insurer will pay. ($120,000 - $80,000 = $40,000)

If the building had been insured for at least $120,000, the insurer would have reimbursed you for the full amount of the loss. Coinsurance can be tricky and cost you a ton of money if you under insure your property.