So you’re talking to your insurance broker and the broker says to you, “you know, you might have a co-insurance problem here with your evaluation.” Wait a minute: Co-insurance? What’s that? Hi, I’m Jeff Gordon from Gordon Atlantic Insurance.
Tricks To Protect Your Property
Co-insurance actually is a feature of a policy with property insurance that affects your inventory in stock, or a building, or any other property you are insuring. It requires that you insure to pretty close to the true value. An 80% co-insurance is a common figure.
For example, if you have a building that would take $1,000,000 to replace, then the insurance company wants you to insure for no less than $800,000, because there’s actually a relationship between the size of the building and the expected losses on a given building.
Why Should I Buy That Much Coverage?
Now we all know that total losses are very uncommon, particularly today where so many buildings have fire protection sprinklers and other prevention devices. And so you might ask the question: if I’ve got a million dollar building, the chances of a loss over a hundred thousand are really small. So let’s just insure it for a hundred thousand dollars. That makes sense, until you think about the co-insurance issue.
The Formula For Co-Insurance
The insurance company uses this metric to make sure they get enough rate to insure that property properly, even if the highest loss is only $100,000. But here’s how it works. They’ll use a formula such as an 80% co-insurance rule, which says if you have a $1,000,000 building, you have to insure it for at least $800,000.
And if you don’t, if you insured for only $600,000, then they’ll only pay a proportion of the amount of insurance that you buy, divided by the amount of insurance that you should have bought.
What Happens If You Don’t Buy Enough Insurance?
In this example, for a $1,000,000 building, you should have bought $800,000 of insurance. You only bought $600,000. That formula is three-quarters, and so for a small $100,000 loss, they’re only going to pay $75,000. By not paying attention to the co-insurance, you’ve just raised your deductible big time. You have to be careful about this.
Co-Insurance Is Becoming Obsolete, But Still Exists In Some Places
The good news is that with big data, more and more properties can be rated without co-insurance as a factor. Big data insurance companies are able to figure out proper risk without having to rely on this old formula. But co-insurance is still out there today. When you’re insuring buildings and properties, you still have to pay attention to it because of these legacy contracts. It’s going away, but still be careful.
About Geoff Gordon
Geoff Gordon has been the owner/president of the Gordon Atlantic Insurance agency since 1987. Gordon Atlantic Insurance provides commercial and personal insurance to businesses and families throughout Massachusetts.
A prolific writer and recognized industry thought leader, Geoff has contributed articles to Banker & Tradesman, a regional trade periodical, and served on the Quincy Patriot Ledger’s Board of Economic Advisors column. He is a member of the Plymouth Rock Assurance Agents Advisory Council as well as the Bunker Hill Insurance Agents Advisory Council. Geoff has presented to the Financial Planning Association’s (FPA) education series and teaches locally. Most recently Geoff spoke to a TEDx conference on “Personal Risk for a Rich Life” in February 2016.
Geoff obtained his Certified Financial Planner (CFP®) designation in 1985, the Certified Insurance Counselor (CIC) in 1995, and his Certified Risk Manager (CRM) designation in 2004, and serves as an Asssociate Faculty member of the Institute of Insurance Education and Reasearch, a national credentialling organization.