It’s strange looking at something on a piece of paper that says, “100%” and not feel proud. It is embedded into our brains! 100% means the best that there is, right? For many things, yes.

For coinsurance? NO.

What is coinsurance, anyway?

Coinsurance, when used in the context of property coverage, means the percentage of value a policyholder is required to insure. The value is assessed at the time of a loss, and if it isn’t diligently and frequently assessed can leave policyholders with a devastating penalty.

Coinsurance can be written on an 80/20, 90/100 or 100% rule. For example, if you have an 80% coinsurance clause on your policy, the insurance company is responsible for 80% and you, the insured, are responsible for 20%, plus the deductible.

In a typical commercial property insurance policy, a coinsurance clause ensures that you carry adequate coverage to protect your possessions. Say your manufacturing building is valued at $200,000. To protect that property for its value, you would need at least $200,000 in property insurance coverage. If your policy has a clause with a coinsurance percentage of at least 80%, that means you must insure the building for at least $160,000.

If you purchase less coverage (e.g., a policy with only $150,000 in business property protection), the insurance company can penalize you. In other words, when you make a claim for damaged property, the company may not pay out the full value of your damages, even if they fall within the limits of your policy.

Let’s look at an example

Say a fire causes $100,000 worth of property damage and you make a claim. Your property insurance policy has a limit of $150,000 and a $5,000 deductible. Per your coinsurance clause, you were supposed to purchase at least $160,000 in coverage.

Because you failed to meet your coinsurance percentage of 80%, you will face a coinsurance penalty. Your penalty is determined by the ratio of the amount you carried divided by the amount that was required: $150,000 / $160,000 = 0.937. So, if your loss was $100,000, your insurer will only pay you $93,700 minus your $5,000 deductible. Your total penalty will end up being $11,300.

This 11-letter word scattered throughout your policy can do some real damage if ignored. If this is a concern of yours, contact a Marsh McLennan Agency (MMA) advisor

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