Co-Insurance is a clause imposed on most commercial property insurance policies that requires one to insure your property up to a certain limit of insurance (usually 80%-90%, sometimes 100%). This means that if you you neglect to insure your premises to full value, you might have become a “Co-Insurer” on your property & in the event of a claim you may be looking at a problem.
Now we realize that if we under-insure our property, in the eventuality of a total loss, we have been short the main difference. Take that same concept & put it on to a smaller loss:
Example: Actual Building Value $500,000
Building Insured for $300,000
Co-Insurance Clause 90%
Fire Loss $60,000
With this example the insurance policy policy states that you need to be insured up to 90% of the property’s value (building) ($500,000 x 90% = $450,000). You simply have the building insured for $300,000 thus leaving you under-insured by 33 1/2%.
You have a fire loss totaling $60,000. As you were under-insured, the insurance policy company will slow up the amount paid around the loss from the same ratio that you’re under-insured. In this case, the insurer would slow up the payment by 33 1/2% and pay out the comission $40,000. As the “Co-Insurer” you are responsible for the remaining $20,000.
So often be aware of the co-insurance clause on your own policy. My suggestion is you pay to obtain appraisals done in your property every couple of years and ask your broker to maneuver you to “Stated Amount Co-Insurance”. Most insurers will move you to this stated amount co-insurance in return for a copy from the appraisal along with a signed Statement of Values. This binds the company to agree that there won’t be any penalty for under-insurance on partial losses as it proves to them that you have done your best to ensure your values are adequate.
The most important point is always to remember that the onus is on you to ensure that your values are adequate. Even if you have had the aid of your broker or another outside source in determining the value of your property, in case of a covered loss, the insurers are very only just taking your word for this at the end of the day. It means not even attempt to them in the event you under-insure your property, that is why they have this clause to safeguard them. Who’s protecting you?