Many tend to neglect the coinsurance provision found in business property insurance. However, this term is an important factor that determines whether you will receive sufficient compensation for your property damage. Most accidents are likely to be partial losses with the chance of a total loss being low. With that in mind, a policyholder is likely to underinsure the building by purchasing lower coverage limits to save on premiums. The concept of coinsurance is an agreement between policyholders who want to lower their insurance coverage limits to pay less, and insurance companies that want to maintain their insurance coverage limits at a reasonable level.
Coinsurance stipulates that at the time of loss, more than a certain percentage (usually 80%) of its full value should be insured. If this regulation is violated, you will not be able to receive 100% compensation for when a partial loss occurs.
Let’s say that you own a commercial property worth $100,000 and insure it for $40,000 with 80% coinsurance. A fire occurs resulting in a loss of $40,000. Although the loss amount falls within $40,000, you will only receive $20,000. This is because you have failed to meet your coinsurance percentage of 80%. Under the coinsurance provision, the property should have been insured no less than 80 % of full value ($80,000 ). Since only half ($40,000) of the required amount ($80,000) was insured, your insurer will only pay half of your loss ($20,000). This is called Co-Insurance Penalty in insurance terms.
In commercial insurance, the value of a business property is based on its value at the time of loss. Due to this reason, it is important to regularly check if you have sufficient ring your business property. coverage amounts and make the appropriate adjustments to the limits. This will prevent cases of being penalized for partial losses under the coinsurance clause. The coinsurance penalty doesn’t apply to total loss accidents. However, since you will be paid within the insured limit, having the sufficient coverage amount is important. If reducing your insurance premium is a priority, consider increasing your deductible rather than underinsuring your business property.