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Most business property insurance properties consist of a “coinsurance” clause, which stipulates what percentage of the total value of your business property must be insured to be fully reimbursed for a loss, even a partial one. (Did you know? Most losses are partial.) Should you insure for less than that amount, your business property insurance company may impose what is known as a “coinsurance penalty” on your claim.
Coinsurance works in the following way: If you have a building insured that you estimate would cost $100,000 to replace, and a coinsurance penalty in your business property insurance policy of 80 percent. You subsequently insure the building for $80,000, all the while thinking you have fulfilled your coinsurance clause. What happens next? A fire loss causes $60,000 worth of damage, and in response you submit a claim. Your business insurance company then determines that the replacement cost of the building is actually $150,000. In order to determine how much to pay on the claim, the insurance company divides the amount of insurance you purchased ($80,000) by the amount you technically should have purchased (80% of $150,000 or $120,000), resulting in two-thirds of the $60,000 covered, which is $40,000. This amount, $40,000, is the amount of your claim that the insurer will ultimately pay.
In summary, even for a partial loss within the monetary limits of your business property insurance policy, you will receive just two-thirds of the amount claimed. If you had insured the building for at least $120,000, then the insurer would have had to reimburse you for the full amount of the loss.
Always check with your business property insurance agent to help you maintain the amount of coverage you want, and assure that you have the proper amount of coverage. You can even add an endorsement to the policy that will automatically increase your policy limits in order to keep pace with inflation.
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