Understanding Coinsurance In Business Insurance

Referring to either a coverage provided by a number of insurance companies, or a property coverage provision referred to as a clause, the term “coinsurance” can be used. That’s pretty vague. It only partially answers the question of what coinsurance actually is.

Two different things can be meant by “coinsurance”:

  • Insurance provided by one insurance company or more – when an entity or person is jointly covered by two or more insurance providers, it is referred to (the coverage) as coinsurance.
  • Set by your insurer, a property coverage provision – A coinsurance clause might apply to your property insurance policy. For a certain percent of your property’s value, you would be required to carry coverage. That way, if you need to make a claim, your insurer is assured of your having adequate coverage.

The second bullet point above, for small business insurance, is usually the one that applies. It’s most likely a property insurance provision, if you see the term used in a policy, which requires you to insure your business property for as much as 80% of its value.

The Workings of Coinsurance

What is coinsurance all about? How does it work? Basically – and very simply put – to protect your possessions/property, adequate coverage is better insured by a coinsurance policy/clause. It’s extra protection.

Regarding the 80% of a property’s value needing insurance: If that coinsurance percentage of 80% was not met, there is every possibility you could face a penalty. Your penalty will be figured out using the ratio of your carried amount divided by the required amount.

Here’s what we’re talking about: Let’s say there is a value of $200,000 on your building. At least $200,000 in property insurance coverage would be needed to protect that property.

If, however, there’s at least an 80% coinsurance percentage clause on your policy, for at least $160,000, you would have to insure the building. Here’s where the penalty comes in… if you purchased less coverage than the 80%. In that case, the company might not pay the full value of your damages when you make a claim for damaged property. Even if the damages fell within your policy’s limits, they may still not pay because you didn’t have at least 80% coverage or better.

Coinsurance Clauses – Why Insurance Companies Have Them

Not every policy from an insurance company includes a coinsurance clause. There are three reasons, however, for doing so when coinsurance is required:

  • To encourage accurate underwriting and assessment – Regarding the value of your assets, you’re more likely to make an accurate assessment when you’re required to meet coinsurance limits. In the long term, both you and the insurance provider benefit.
  • To protect their resources pool – If your business has numerous assets, leading to an insurance claim, there can be lots of damage opportunities. To handle real-world claim situations, the insurance provider is better equipped because, to match your risk exposure, you’d be required to buy ample insurance.
  • To ensure adequate coverage for clients – Of the three bullet points here, this may be the most crucial. With insurance, to cover all your assets, you may feel like you just can’t justify investing enough money. You’ll be glad you have good protection, however, if you ever need coverage. Better safe than sorry.

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