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Coinsurance: an Essential Concept in Property Insurance

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Coinsurance: an Essential Concept in Property Insurance Coinsurance: An Essential Concept in Property Insurance November 19, 2015 Male: Adjusters International Property Insurance Roundtable, features casualty and property insurance experts, discussing current issues affecting first party claims. Each podcast focuses on a topic taken from an issue of Adjusting Today, a publication from Adjusters International that is written from a policyholder’s perspective, and includes real life examples intended to improve disaster preparedness. Marjorie: Hi I'm Marjorie Musick and welcome to Adjusters International Property Insurance Roundtable. Today we’ll be discussing coinsurance. Our panelists include Craig Becker, Executive Vice President of Globe Midwest, Scott Eich Executive General Adjuster at Adjusters International Colorado, James R. Mahurin Risk Management Consultant and C. Todd Thomas, Director of Consulting Services at Adjusters International. Now we’re [00:01:00] going to move on to the question guys, and we’re going to give each of you an opportunity answer each question. Okay, Craig could you explain what coinsurance is for us please? Craig: Coinsurance is a clause found in commercial policies. I know we’re talking about residential policies also, but it’s not technically called a coinsurance clause in a residential policy. In a residential policy, it’s called a replacement cost clause. The 80% of replacement cost requirement clause I should say, but in general terms a coinsurance clause is clause on a property insurance policy, that requires the policyholder to carry a certain amount of insurance, which is equal to or greater, it could be greater, than a pre- determined stated value. That value could be the actual cash value of the property, it could be the replacement cost of the property and it can be any percentage really. [00:02:00] Most forms are 80%, that’s where there’s a lot of confusion in homeowners forms, because it’s also 80% so it looks like the coinsurance requirement clause, but it’s really a little different. Most of these commercial forms are 80%/90%/100%. I’ve seen 50%, but it requires the policyholder carry a certain amount of coverage to what the property is valued at, and also as to what the percentage is. Marjorie: Thank you Craig, Scott do you have anything you have to add to that? Scott: Yeah, and adding to what Craig just said the consequences or the ramifications of the coinsurance clause are that, if the value that Craig had previously stated are not met after the insured incurs a loss, the carrier will impose what's known as the coinsurance [00:03:00] penalty, which could reduce the actual settlement value of the claim by an amount that they’re not insured to that value either 80%, 90% or 100%. Marjorie: Okay, great. Thank you Scott, Jim did you have anything to add to that? Jim: I think it’s important to add that a coinsurance clause is a mechanism that you use to make adequate insurance affordable. The premise of the clause is to require valuation that represents the value of the structure to be insured. There’s a tendency for people to insure for less than the full value, and as most losses are partial, that drives costs up to where they’re to be unaffordable, particularly if you have a high valued property and you had insurance for the full value, so it’s a mechanism that greatly affects the price and [00:04:00] cost, and availability of insurance. I’ve had the opportunity to work in states that did not allow coinsurance, and the price of property coverage is quite high. I think this is an issue that’s often very poorly understood both in application and purpose, but it is the clause in the policy that stipulates the relationship, between the value to be insured and the value of the property insured. I’m sorry - the amount of insurance that is purchased on that property. Marjorie: Thank you Jim. Todd did you have anything to add to that? Todd: No, I think that our Roundtable did a nice job explaining that. Marjorie: Great, Craig could you tell us a little bit about why coinsurance would be included in a policy? [00:05:00] Craig: That’s a very interesting question and to answer that question … there’s two answers to that question. There’s why an insurance company would want to put coinsurance on a policy, and the second question is why would an insured/policyholder want to have coinsurance on the policy? I’ll answer from the company side first. The concept of insurance is spreading the risk of a few … I’m sorry, to get the risk of a few over many, so it’s the rule of large numbers. If you’re an insurance company, many, many years ago insurance companies that first contemplated and I’m probably talking the 1940s or the 1950s, it was very common for policyholders to carry less amounts of coverage than they actually needed to be properly insured, because from a statistical point of view the [00:06:00] chances of having a total loss on a structure were very slim. Insurance companies figured out that, there was a lot of premium dollars that were not being collected and not looking at an individual policy, we’re looking at the risk of millions of policies that are written in this country. A lot of insurance premium dollars were not being collected, and yet insurers were over, again, the law of large numbers were adequately protected, because most people were going to have a partial loss, so coinsurance was thought up and it’s to make, require a policyholder to carry more aiblc.com/podcast Page 2 of 14 insurance. When you carry more insurance of course the premium goes up, total premium so it was a mechanism for insurance companies to make policyholders more or [00:07:00] less correctly insure their property, and to collect more premium across the broad spectrum of all these policies. From an insurance point of view, from a policyholders point of view, the higher percentage of coinsurance you have, the less you pay per $100 of coverage, so the rate that you’re being charged on $100 goes down as your coinsurance goes up, then that’s simply because you’re… overall you’re paying more insurance, but per $100 of coverage that goes down, so you got to look at it from both the insurance company’s point of view and the policyholders point of view. Marjorie: Thank you Craig, Scott did you have anything to add to that? Scott: That was a pretty comprehensive analysis. To sum it up, basically, it’s really simply to avoid the inequality, and to encourage insured to carry a reasonable, correct amount of [00:08:00] insurance in relation to the replacement value, or the ACV whatever they elected to choose for their property. Marjorie: Thank you Scott, Jim did you have anything to add to that? Jim: I think it’s important to add that to insure property without coinsurance the cost is very, very high. The ISO published rate increases by 50%, but personally I doubt if any carrier is doing that. Coinsurance is a mechanism that makes adequate coverage affordable on a broad basis. Todd: Jim you mentioned, this is Todd. You mentioned ISO, can you explain that? Jim: The Insurance Services Office publishes loss cost, and base rates that are used by the insurance industry countrywide. Todd: Thank you. Marjorie: Todd did you have anything to add? [00:09:00] Todd: Not at this time. Marjorie: Okay, great. Craig could you tell us a little bit about the challenges that policyholders face when filling an insurance claim on policies that include coinsurance? Craig: The big challenge staring every policyholder down is, whether or not the value that he or she purchased are adequate to comply with the coinsurance. When you have a total loss there’s no value left, and we’ll just confine this to the structure…., but business interruption, you have a total loss on a structure there is no value remaining, mathematically, you will … if your claim is handled correctly you will be paid the policy limit. That’s great news but the flip side of that is, the policy limit may be inadequate to aiblc.com/podcast Page 3 of 14 [00:10:00] compensate you for your loss, but mathematically if you have no value remaining even though when you do the calculations, there will be a coinsurance penalty applied to the loss that number will either equal to, equal or achieve the limit of liability. The real challenge is to make sure your property is properly insured. Because if you have a partial loss you are going to incur a penalty, and the term coinsurance literally means, you’ve agreed when you took out that policy to be a co-insurer. You are insuring a portion of any loss that you may have. Marjorie: Thank you Craig, Scott did you have anything you’d like to add to that? Scott: Yeah Marjorie. I think one of the greatest challenges of course to a policyholder when [00:11:00] they do have a claim, really to try and maximize whatever they can get for the claim, by having to adhere to how the policy reads. And in this case, if you do have say an 80% or whatever the percentage might be for your coinsurance, you have to look at a couple different angles to see, which valuation and calculation of that penalty could potentially maximize or diminish, what you receive for your claim.
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