Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

WHAT IS COINSURANCE?

Coinsurance is a property insurance provision that penalizes the insured's loss recovery if the limit of insurance purchased by the insured is not at least equal to a specified percentage (commonly 80 percent) of the value of the insured property.. For example, if a building valued at $250,000 is insured with a policy containing an 80% coinsurance clause, the policyholder must purchase at least $200,000 in coverage. If the policyholder purchased less than $200,000, he or she would be responsible for a proportionate share of the loss.

IS A COINSURANCE CLAUSE VALID?

Most commonly, yes. Some states, including Kentucky, have passed statutes voiding coinsurance clauses in property insurance policies which insure risks associated with fire or storm damage on real property. However, in states that have not passed a statute prohibiting coinsurance clauses, courts follow the common law and uphold them.

HOW IT WORKS

The basic formula for determining whether you have enough coverage is:

Actual Amount of Insurance divided by the Required Amount of Insurance then multiplied by the Amount of Loss. This equals the amount the insurance company will pay, less any applicable deductible.

More plainly, let's assume we have a building valued at $100,000. Under an 80% coinsurance clause, an insured would be expected to insure 80% of these values, or $80,000.

Now, let's consider two scenarios, the amount of the loss in each case is $30,000:

First, the policyholder only carries $50,000 in coverage:

($50,000/$80,000) x $30,000 = $18,750 (less deductible). The policyholder is forced to pay, or self-insure, the shortfall of $11,250.

Second, the policyholder carries the full $80,000 required under his policy:

($80,000/$80,000) x $30,000 = $30,000 (less deductible). In this example, the policyholder would receive full benefits.

Some policyholders choose to self-insure and rely on savings. However, most policyholders purchase insurance with the intent to be fully covered. As the examples illustrate, the unknowing policyholder can suffer great financial hardship by not purchasing the amount of insurance required by the coinsurance provision.

It is important that all policyholders know whether their policies contain a coinsurance clause and, if so, whether they have purchased the amount of insurance required to receive the full benefits they expect. Regular appraisals can ensure that property values, inflation, and depreciation are taken into account in your insurance limits. An evaluation or appraisal once every three years is a good rule of thumb, but may or may not be sufficient depending on the circumstances.

The significant and sad facts of this case are as follows:

Mrs. Blake's first language is German and she speaks English as a second language. She was the only listed named insured on the policy...Mr. Blake is not expressly named in the policy. Her home was burglarized by an unknown assailant on November 4, 2005. She furnished First Home with timely notice of loss, proof of claim and otherwise performed all conditions precedent to coverage. First Home requested an EUO and Mrs. Blake attended the EUO...During the EUO, the examiner asked her, “Who lives in the home with you?” Mrs. Blake replied, “Me, my husband and my daughter.”

This non-date specific question appears to be the only question that asks about the status of who was living at the home. Nothing in the answer suggested when precisely Mr. Blake lived with Mrs. Blake and her daughter. As Mr. Blake is not listed on the policy, it would have been highly probative and relevant to ask about the time period that Mr. Blake resided in the home. After the EUO concluded, First Home proceeded to request the EUO of Mr. Blake. The first request was addressed to Mrs. Blake's attorney Ryan Ratliff on July 27, 2006. Mr. Ratliff did not forward this notice to Mr. Blake, as he did not represent him. The second request was sent directly to the home address that is the subject of the policy, certified mail return receipt requested. First Home has not come forth with a return receipt indicating that Mr. Blake ever signed for the letter.

Mrs. Blake filed an affidavit in opposition to First Home's summary judgment motion, pointing out her language problem and clarifying her testimony during the EUO by bringing forth a certified copy of a permanent domestic violence injunction...It ordered Karl Blake could “not go to, in, or within 500 feet” of Mrs. Blake's residence....
...

Mrs. Blake argued that Mr. Blake was not an insured. More importantly, counsel for Mrs. Blake argued that “[t]he noncooperative spouse cannot hold a cooperative spouse's claim hostage.” To this point, he cited...case law...that “the refusal by insured's husband to submit to an examination under oath did not operate to prevent insured from recovering for loss of her property . . . but merely prevented husband from recovering benefits or any loss he might have suffered.” First Home conceded that Mr. Blake was not a named insured, but was an “additional insured.” Counsel for Mrs. Blake brought to the trial court's attention the “innocent co-insured” exception.

Notwithstanding, the trial court granted summary judgment. It was concerned that Mrs. Blake's failure to advise First Home, that she and her husband had separated, prejudiced First Home. The trial court further felt that First Home could have attempted to locate and serve Mr. Blake, if it had been aware that he was no longer living in the home. This appeal followed."

Interestingly, the Court found that the husband was "an insured" under the policy at the time of the loss:

[W]e find that Mr. Blake was an additional insured on the date of incident. Seitlin & Co. v. Phoenix Ins. Co., 650 So. 2d 624 (Fla. 3d DCA 1994) (holding that university student living at off-campus apartment was an additional insured because he had not permanently left his parent's home). We also find Mr. Blake ceased to be an additional insured, as of the date he permanently moved out of the home. Allstate Ins. Co. v. Fulton, 345 So. 2d 854, 855 (Fla. 3d DCA 1977) (“[O]nce she ceased to be a resident spouse ‘of the Named Insured's household,' she ceased to be an insured.”) While he is no longer currently an insured of First Home for any losses that arose after he left the home permanently, that does not mean he is no longer covered by First Home with respect to the loss that occurred on November 24, 2005. Therefore, we hold that Mr. Blake was an insured, and was required to attend an EUO.... (emphasis added)

The hurdle and issue for the innocent spouse is whether the failure of another spouse to appear for an examination will prevent recovery to the innocent spouse. The Court ruled for the innocent spouse in this case, reasoning:

We find that First Home's policy only mandated that at least one insured attend an EUO, not that every insured attend an EUO to satisfy a condition precedent to coverage for the claim of each insured. First Home could have required the joint attendance of all insured in its policy language, but did not expressly do so. See USAA Cas. Ins. Co. v. Gordon, 707 So. 2d 1185, 1186 (Fla. 4th DCA 1998) (court found that the use of the term “any insured” was unambiguous as compared to the vague term “the insured”). If properly worded, certain policy terms can expressly create joint obligations and defeat recovery by an innocent co-insured. Kattom v. New Hampshire Indem. Co., 968 So. 2d 602, 605 (Fla. 2d DCA 2007). Nonetheless, where a policy does not express whether the obligation to attend an EUO is joint or several, the ambiguity should be resolved as requiring the obligations and coverage to apply severally. Overton v. Progressive Ins. Co., 585 So. 2d 445 (Fla. 4th DCA 1991) (“We conclude that the policy must be interpreted to provide several rather than joint coverage and that appellant, as an innocent insured, is to be afforded coverage under the Progressive policy.”) Therefore, we hold that First Home was free to deny Mr. Blake's claim because he failed to attend an EUO, but should have covered Mrs. Blake based on the language of its own policy. (emphasis added)

This is an issue that is not going away. Insurance companies will write policies requiring joint obligations, which present an opportunity for one person involved to breach the contract and threaten chances of recovery for an insured who fulfills all the required obligations. When emotions run high,  "resident relatives" who are "omnibus policyholders" sometimes act in spite to the detriment of all involved. It is tough enough to insure against perils of God that cause misfortune and collect from an insurer. Making an honest and innocent insurance customer dependent on third parties, who often don't care and may even hate the policyholder, adds another uncertain variable to recovery.

Insurance agents and brokers should be especially cautious with insurance to value calculations. They should explain the importance of insuring a structure to full replacement cost and explain the consequences for the failure to do so. From what most policyholders tell me, as well as my own experience, the discussion of insuring to value often goes something like this:

Agent: “Joe, we have to place on the application how much insurance you need.”

Joe Policyholder: “I just hope I can afford what you are about to quote me.”

Agent: “Well, how much is your building value if you had to replace it?”

JP: “I don’t know. How much did I have it insured for last year?”

Agent: “A little more than a million, $1.23 million. Have you made any improvements since last year?”

JP: “We added some computer wires, made a new conference room, and upgraded the air conditioning for our IT Department. I think all that would be around $200,000. Maybe we should add that amount to what we had from the year before? Didn’t the carrier send out a guy to look at the building? What did he say?”

Agent: “I cannot seem to locate it. Do you feel comfortable if I insured it for $1.45 million as the replacement cost? If you feel that is the right amount and can replace the property for that, I can get some quotes with cheaper premiums if you agree that you have insured to 90 percent or 100 percent of the full replacement cost value. You have to be sure about the amount of insurance or there ca be a penalty if we get this discount for you.”

JP: “Great. Gosh, I didn’t know we could save money just by insuring to the full replacement cost. Fantastic! Thanks.”

Now, most agents reading this will say they go into far greater detail. Many do, and I have seen a number of in depth discussions and proposals fully explaining everything. But, I have also been in clients’ offices while the insuring value is discussed. Often, my hypothetical is not far off from what I have heard. Policyholders want great coverage at great prices. Many agents simply want sales. Sometimes, both choose to ignore the small details of exactly how the product works and the grave importance of insuring properly because price is higher and agent shopping may ensue.

Christopher Boggs, a CPCU, wrote an excellent article last week, Applying Coinsurance to Homeowners' and CPP's, that is simply a must read for agents and brokers because of his warnings regarding possible claims of errors and omissions claims. Policyholders and adjusters can also learn a lot from it as well. The possible claims against agents for leaving policyholders with a 100 percent coinsurance policy could not be clearer:

“The commercial property policy allows the insured the option to use 80%, 90% or 100% coinsurance. As the coinsurance percentage increases, the property rate (or loss cost) decreases. But should 100 percent coinsurance be used?

From an errors and omissions perspective, probably not; using 100 percent coinsurance leaves no room for an incorrect calculation which requires the insured to always have 100 percent of the value in force. Even attaching the inflation guard endorsement may not give the insured adequate coverage at the time of the loss.

Commercial property policy insureds also have the opportunity to write all property coverage under a blanket limit of protection. Blanket limit policies are the preferred method when the insured is trying to avoid undervaluing a particular class of property or a particular property location (especially if there are several properties or contents moving among several buildings or locations). However, use of a blanket limit requires the minimum coinsurance percentage be increased to 90 percent.
…
But, as stated above, even though the property is valued at 100 percent of its TIV, do not increase the commercial client's coinsurance to 100 percent (even though there is a slight premium break). Use 90 percent to avoid most miscalculation problems and allow some room for an unexpected increase in replacement cost.”

This is excellent advice. It is very difficult to accurately estimate the replacement cost of a significant structure. Even bids for construction can wildly vary. How much should anybody really bet on any one estimate getting the replacement cost just right?

Another useful tip was to use “agreed values:”

“One approach CPP insureds can employ to avoid the application of coinsurance is "agreed value." As the name suggests, the agreed value is the value the insured and the underwriter agree the property is worth. Attaching the agreed value endorsement suspends the coinsurance provision for one year. At the end of the year, a new schedule must be submitted and a new agreement reached.”

The last thing a policyholder wants is to have a loss. Having a loss where the claim is not paid in full will undoubtedly cause issues about why enough insurance was not obtained. My view is “safe is better than sorry.” I suggest when it comes to coinsurance, it is the best policy.

Most fall into the second category. There is an epidemic of underinsured structures. I have no idea why the insurance industry is not pushing harder to correct this problem, but I suspect ninety percent of all properties do not have the coverage necessary to fully replace a structure following a catastrophe.

This problem was highlighted in 2004 congressional hearings following Hurricane Isabel in 2003. A number of Mid-Atlantic Congressional leaders had complaints from constituents following these storms. The claims handling problems were exacerbated by many not having sufficient National Flood Insurance limits. Those from major computerized construction cost estimating companies essentially testified that the construction costs in their database reflected new construction costs not following a catastrophe. If a catastrophe ensued, the costs could be up to forty percent higher.

When policyholders underinsure, it is an underwriting problem. The issue rarely arises because the vast majority of all losses are small--many are not even reported because of deductibles or the hassle of reporting and collecting upon small claims is financially not worth the effort. Some policyholders are even warned that they may become "undesirable" for reporting small losses--so they simply do not. So, the first lesson is that most losses are not total and the need for policy limit coverage seldom arises.

But what about co-insurance penalties that penalize policyholders for not insuring to value as I warned recently in "Coinsurance Penalties Await Policyholders Who Do Not Insure to Full Value?" A coinsurance penalty occurs when a policyholder purchases less coverage than is needed to insure to full replacement value. It exists just to prevent policyholders from gambling with the probabilities that a total loss will never happen.

Typically, the larger the loss, the greater the economic incentive for the insurer to investigate whether a coinsurance penalty applies. The second lesson is to avoid the financial catastrophe of having any significant loss not fully covered. Policyholders, agents, and insurers need to promote the idea that properly insuring to value is a significant part of underwriting. The wide-spread practice of promoting construction underwriting estimates that are insufficient to restore structures must stop. All of us in the insurance claim business see this underinsured to value phenomenon as a repeated problem---is anybody at underwriting listening?

If National Flood had doubled the residential limits to $500,000 and made commercial limits available to $1,000,000, with proper underwriting of insurance to value, many of the Hurricane Katrina total loss cases may never have been litigated. While there seems to be significant political reservation about the Federal Government competing with the private market, why not increase the coverage? The insurance industry cannot or will not underwrite at a limit that satisfies the vast majority of structures. Increased coverage would allow National Flood to insure to value on many structures and therefore, be more actuarially sound.

The uninsured flood policyholders need better education or "required" lending incentives to purchase flood coverage. Standard mortgage requirements at time of closing need to reflect the flood peril. Flood waters occur much further inland than many expect. While infrequent, inland floods can devastate, but the cost is so minimal in those areas of slight risk that it should almost be required--just ask those several miles from the Mississippi and Louisiana coasts. Flood limits should be the same as "all-risk" limits. Many coastal insureds had substantially less coverage for flood than under their all-risk policies. The third lesson is that the concept of insuring to value should be promoted in flood underwriting. Currently, that seems to be a foreign concept.

Some may wonder why I would call for higher National Flood limits and better underwriting of policies. After all, it would certainly decrease the need for my legal services. Many Katrina lawsuits in Mississippi would never have been filed if these few suggestions were followed. Many Hurricane Ike lawsuits in Galveston and the Bolivar Peninsula would not be needed either. Much of this madness can stop without a major disruption in the day to day operation of the way insurance currently works and without major political changes to National Flood, if today's suggestion were put into practice.

So why not do it? It seems the only people to lose are the lawyers, and we have no problem with that in this case. We have plenty of other insurance coverage disputes to keep us busy.

I received an email from an insurance agent and appraiser, John Nixon, that warns of many condominiums "shopping" for cheap appraisals and low estimates for the full replacement value be insured. He wrote:

"Lately, I’ve seen some "professional appraisers" advertising that independent appraisals can help reduce homeowners or commercial property insurance premiums. These ads are suggesting that the insurance carriers are cheating the consumer by inflating estimated replacement costs.

Indeed, some ignorant legislator is accusing Citizens of wrongdoing because he can get an independent appraisal 30-50% lower. These appraisers are using tools and methods inappropriate for insurance purposes: new construction vs. reconstruction, inappropriate deductions for covered property, shorting measurements, and/or failure to include building features.

Sadly, many good independent appraisers were driven out of the insurance to value business by a generation of appraisers willing to work for low fees. Many of these new appraisers unethically do their job and "hit" the number their client wants. This same type of unethical behavior by real estate appraisers generated over-valuation and fueled mortgage fraud. In part, these activities helped lead to the collapse of the lending market.

Now, these same appraisers are trying to appease client demands and "hit" a low number for insurance premium purposes. The insurance consumer doesn’t know any better. However, they will get a hard lesson when the carrier uses different tools and methods when it comes time to calculate coinsurance requirements after a loss. Neither the clever agent nor unethical appraiser will help their client recover from inadequate limits and resulting coinsurance penalties.

I have tried to get Citizens Property Insurance Corporation to clarify their advice for consumers on getting replacement cost estimates for insurance to value purposes, but they declined. They have left the responsibility with the uneducated policyholder to determine appropriate valuation methods. They also declined to disclose what standards they would use post-loss.

Does an underwriter’s acceptance of an independent appraisal on the front-end for underwriting purposes obligate them to use the method/calculations on the back-end for coinsurance calculations? If the coinsurance penalty holds up, have you ever tried to go after appraisers E&O coverage?

In most cases they will have used M&S cost guides and software which have a license restriction prohibiting their use for insurance purposes. I think the agents are more careful to cover their malpractice exposure with signed waivers.

John Nixon
President
Asperta, Ltd."

There is no definitive answer, as each case depends on the facts. I deal with the ramifications of coinsurance penalties all the time. The worst offenders are usually commercial businesses and condominiums. There are various methods we use to avoid coinsurance penalties when the issue arises.

However, I urge all policyholders to get a professional replacement value estimate if feasible. To be safe, over-insure rather than underinsure. Most of the time, many who believe they over-insured are still underinsured.

Agents have to be careful as well. We currently have an eight-figure errors and omission case against an agent. The case involves a co-insurance penalty, and the agent helped make the determination as to the amount of required insurance.

Most condominium associations will be underinsured unless they retain a professional and thorough firm to make an insurance to value analysis. Many condominium association policies carry co-insurance clauses which penalize condominiums for not carrying enough insurance to cover full replacement cost. Our clients and public adjusters have told us that some insurers are specifically asking their field adjusters to question the accuracy of the amount insured and make a determination as to whether a co-insurance penalty should applied.

When co-insurance penalties are applied, most policyholders tell us that they relied on their insurance agent to help determine the amount to be insured. We are currently in litigation in the Lakeshore of Polk County Condominium Association case where we won the underlying case against the carrier, but a co-insurance penalty was applied. The current litigation, lead by Donna DeVaney, involves the insurance agent's neglect in estimating accurate replacement cost. The controversy amounts to millions of dollars because of the size of the losses.

Insurance is a very important financial product, one I truly appreciate as a consumer and a litigator--I love this area of law. However, everybody, including the buyer of property insurance and middleman arranging for the sale, should be careful to obtain the correct coverage. The ramifications caused by co-insurance penalties can be devastating.