Commercial Property Owners: Do you fully understand the insurance coverage clause in your commercial property policy? If you answered no, you are not alone. It is one of the most misunderstood terms in insurance.
Everyone understands the concept of co-insurance when it's time to pay a doctor or dentist bill, right? If you have 80 percent payment, your health insurance covers 80 percent of the bill and you pay the other 20 percent from your pocket. Pretty simple.
But when it comes to commercial property insurance, joint insurance becomes a bit more complicated – and doesn't understand that it can be expensive.
Most commercial property rights have an insurance clause. In this context, joint insurance is the percentage of value that the policyholder is required to insure his property for. If you have a building valued at $ 1 million and your policy has an 80 percent coordinated clause, it means you should insure the building for at least $ 800,000.
But it's not always cut and dry. The "value" is determined at the loss and if the insurance amount you have purchased is less than the insurance percentage stated in the policy, a penalty is applied, which reduces the payment of the claim. And it can be a big financial kind.
Most property insurance obligations involve only partial losses. So why can't you just insure your building for some of its value and save some money?
Let's look at the hypothetical scenario above …
You have a building valued at $ 1 million and an 80 percent co-insurance clause in your commercial property policy, meaning you need at least $ 800,000 in coverage. But you decide to cut corners and just insure the building for $ 600,000. Your policy also has a $ 5,000 deductible.
One day you suffer a fire in your building causing $ 200,000 in damage. Damage settlement is calculated first by dividing the amount of insurance you purchased ($ 600,000) by the amount you would purchase under your policy ($ 800,000), which is .75. That factor is then multiplied by the loss, so $ 200,000 x .75, which is $ 150,000. So your insurance accommodation is $ 50,000. Finally, your $ 5,000 deductible is subtracted.
Bottom line: You get a $ 145,000 offset for your $ 200,000 loss. Will you be able to cover the $ 55,000 balance to make your business work again? What if the damage was even greater, or if your building was a total loss?
Why does the insurance company insure how much coverage you buy?
The whole idea behind Coinsurance as it applies to commercial property insurance is quite simple – encourage policyholders to carry adequate insurance for their property in the event of a catastrophic loss. By requiring policyholders to buy coverage that matches their risk exposure, the insurance company is better prepared to handle claims. Finally, you are more likely to carefully assess the value of your property and assets if you are required to comply with the Coordination Limit. All of this helps protect you and your insurance company.
The Best Protection Against An Expensive Surprise
When it comes to joining commercial real estate, the devil is definitely in the details. Work closely with a trusted insurance advisor to ensure that your building and business property is properly valued and sufficiently insured. It is the best medicine to avoid an expensive insurance home.
Need more information on insuring your commercial property? Contact industry insurance personnel at BNC Agency today.