Coinsurance Penalties & Haircuts

One of the most common, yet unknown, provisions in a commercial insurance contract is coinsurance. Over 27+ years, every time I have discussed this with a broker, agent, an attorney, or most importantly an insured who has suffered a loss, I have noted the look of a deer in headlights. The normal response is “huh, what do you mean coinsurance penalty. I have 100% replacement cost coverage. My loss is fully covered”  Not so fast! Little does the innocent victim or agent/broker realize that a 100%, 90%, or 80% coinsurance requirement means that if the property is not insured to the proper percentage of its insurable value then in partial losses an insured will surely and sorely face a deduction proportionately on any claim payout. 

Even those in the insurance industry have a difficult time explaining to clients the premise and concept of coinsurance as it can be baffling when it is applicable to an insured’s loss where the payout is reduced even though their limits of insurance are higher than what their loss is. A refresher and review check of what coinsurance is and whether one can navigate around it is important. 

Coinsurance Clause

A coinsurance clause, such as one that requires 90% in coinsurance requires that the insured, through his broker or agent, must maintain at least 90% of the insurance on the covered property. Not doing so means that an insured becomes the co-insurer of the loss with the insurer, and has to bear the burden of gaps in coverage proportionately. This is a hidden provision placed by insurers in policies that many insureds, brokers, agents, and risk managers ignore to properly scrutinize and then are hit with penalties. Insurers purposefully design this provision as a penalty as it forces an insured to carry the full or nearly full amount of coverage so an insurer can collect proper premiums in exchange for the risk insured. 

Fundamentally, it is about fairness for an insurer to collect the proper amount of premiums; however, insurer’s agents and brokers sell the insurance and wash their hands off if there is an improper measurement on the valuation of the property at the time the policy is issued. These clauses generally are valid in numerous jurisdictions, other than in some valued policy states, and are held enforceable. 

The coinsurance provision in a commercial property policy is implicated when any loss occurs. The provision is arguably only applicable to partial losses as mathematically the penalty can be strategically negated on a total loss if the right approach is employed. If the property is not insured according to the coinsurance percentage requirement then an insured likely will incur a co-insurance penalty. Accordingly, it is critical that the proper amount of insurance be obtained in a commercial policy with a coinsurance provision so there is no shortfall in coverage. Insurers are actuarial experts and they insist on placing coinsurance penalty provisions so they can gain large market share, charge less than the potential competition, and spread the risk to their own client to become a co-insurer. For the unsavvy insured, it makes the difference between becoming whole after a loss or walks away potentially losing their livelihood.

While math is never a pleasant exercise, an example is demonstrative. For instance, an insured owns a building with a replacement cost value of $1,000,000. If the broker or agent places cover with a 90% coinsurance provision then the insured must at least insure it for $900,000 to comply with the coinsurance provision. That would be 90% of $1,000,000. Of course, this assumes that the broker or agent has properly valued the building RCV at $1,000,000; if not, there could be errors and omission concerns to be addressed, which are outside the scope of this discussion. 

Let’s assume further that due to reasons beyond anyone’s control the building has only $500,000 placed in coverage. Now, if there is a loss there will be a penalty as the formula in most commercial policies is the amount of insurance you have divided by the amount of insurance you should have had multiplied by the amount of loss. Assume an insured suffers a $250,000 loss. Even though there is $500,000 of insurance the recovery is limited to $138,888.89.  In this example the recovery ratio is $500,000 divided by $900,000 = 55%.  Multiplying that 55% recovery ratio by the loss amount of $250,000 permits an insured to the only recover, to their surprise and chagrin, $138,888.89.  That is a large haircut!

Businesses need a Professional Public Adjuster in their corner.

Many sophisticated businesses play the odds to save premiums, bank on no risk of loss, or good loss histories to get reduced insurance and save on premiums. However, insureds want to purchase the peace of mind that they are not left holding an empty bag that places them worse off after a loss. It is important to understand that coinsurance can seriously adversely impact an insured. Retaining a sophisticated professional loss consultant to navigate you out of the jam of a coinsurance haircut is the best option when facing a coinsurance penalty. 

It takes a qualified public adjuster to successfully negate coinsurance penalties by advocating that certain items should not be considered in value, make claims on an actual cash value basis, properly balance the value of the property versus the value of loss equation to maximize a client’s recovery when facing a coinsurance penalty. It is a fallacy to think that simply measuring the loss at its highest justifiable value results in the maximum payout.  On the contrary, as demonstrated in the example above you need to ensure that someone is watching out for your interests to properly understand, strategize, and customize the loss recovery.

SunPoint Public Adjusters, Inc. (“SunPoint”) is the “Gold Standard” of the Public Adjusting industry. We comprehensively review and evaluate your policy, immediately deploy a team of experts to assess and quantify your damages, and customize a strategy around your personal recovery to promptly and properly maximize the resolution of your claim. Our in-house and other veteran experts are experienced in quantifying and negotiating building, personal property, inventory, or other additional coverages. We work solely on your behalf to favorably resolve your claim.  Our experts ensure your insurance company does not delay, diminish, or deny benefits that are rightfully owed to you. Industry experts agree that having a public adjuster like SunPoint on your side early in the process expedites and maximizes your recovery.  

Our team of experts has been advocating on behalf of policyholders for decades. We have handled, managed, and successfully navigated claims ranging from homeowner losses; corporate losses in the hundreds of millions of dollars; disaster losses involving government entities and entire municipalities; agricultural and recall losses, and virtually any type of disaster claim that could be imagined. 

Our team of Public Adjusters, building cost consultants, inventory specialists, forensic accountants, equipment consultants, and many other experts make up a group unmatched in our industry. It is easy to be big. But it takes dedication every day to be the best – we have that dedication. Our goal is aligned with yours.  To obtain a free assessment of your specific circumstances and recovery please contact us to strategize your best means of recovery.