In a recent deposition in an insurance producer malpractice case, the producer was asked about the purpose of co-insurance and how our insured would be impacted under the provision if the building was underinsured. Unfortunately, the producer was unable to explain how the co-insurance provision worked or how the insured could be penalized. This prompted me to think maybe it’s time for a property co-insurance refresher.

‘Coinsurance clauses in substance require the insured to maintain insurance on the property covered by the policy in a certain amount, and stipulate that upon his failure to do so, the insured shall be a coinsurer and bear his proportionate part of the loss on the deficit.’ . . . For example, ‘[i]nsurance policies that protect against hazards such as fire or water damage often specify that the owner of the property may not collect the full amount of insurance for a loss unless the insurance policy covers at least some specified percentage, usually about 80 percent, of the replacement cost of the property.’ . . . Coinsurance clauses are designed to induce the insured to carry full, or nearly full coverage, and are generally held enforceable unless they are specifically prohibited by statute in the jurisdiction.1

In a commercial property policy, the co-insurance provision comes take affect when a loss occurs. If the property is under insured, the insured may incur a co-insurance penalty on a partial loss (it does not come into play on a total loss). So, it is important the insured maintain a sufficient amount of coverage.

Say you own a building with a replacement cost value of $1,000,000, and your policy has an 90% coinsurance provision. You must insure the property for at least $900,000 to comply with the co-insurance provision. For whatever reason, you only insure the property for $500,000. When you have a partial loss, the insurance company will look at the ratio of the amount of coverage, divided by the coinsurance requirement (here 500,000/900,000 = .56). If your loss was $500,000, the insurer will pay $500,000 x .56 = $280,000 (less any applicable deductible). As you can see, the coinsurance penalty can be significant.

Make sure you know if there is a coinsurance provision in your policy, and it you cannot have the provision taken out make sure you understand the consequences of having too little property coverage.
________________________
1 Surratt v. Grain Dealers Mut. Ins. Co., 74 N.C.App. 288 (1985) (quoting 44 Am.Jur.2d Insurance Sec. 1510 at 505-06, and Black’s Law Dictionary 236 (rev. 5th ed. 1979)).

  • Stephen Hadhazi

    In some of the standard form HO-3 policies, it appears that if the policyholder is underinsured be even 1 percent then the language in the loss payable clause will not allow the insurer to depreciate the claim. This could result in a higher claim payout. I can send an example, if you would like.

    Steve

    • Amy Bach

      Stephen can you send the example to me/United Policyholders? amy@uphelp.org

      • Stephen Hadhazi

        Aloha,

        Here is a video that I had done a while back that discusses it:

        https://www.youtube.com/watch?v=JMHBnQV2EBY

        Here is an example of an HO-3 Policy. This specific policy is the HO 00 03 10 00. However, most of the ISO HO-3 policies would likely be the same. Many other policies would also contain similar language, as it is fairly standard.

        http://bit.ly/2JSuukr

        Mahalo!

        Steve

        • Stephen Hadhazi

          Hi Amy

          The insurer cannot both depreciate and apply the co-insurance penalty.

          But, the point to my argument is a little different.

          The policy does not give the insurer discretion as to whether they apply the co-insurance penalty or apply depreciation to the claim. The policy must be followed.

          My point is that there are thousands of claims per year that are heavily depreciated, e.g. 50% and where the home is also under-insured just slightly less than the 80% insured-to-value. (Or whatever the co-insurance percentage is for that policy)

          This means that, had the insurer done a proper investigation of the claim, they would have realized that the home was slightly under-insured and then applied a tiny co-insurance penalty instead of the 50% depreciation.

          Of course, if the insured understood that they had depreciation coming back (many do not realize this), then they might still be better off collecting the depreciation later.

          We all know that many people do not ever collect their recoverable depreciation. Whether it is due to ignorance that it is even available to them or that they waited too long to inform the insurer of their intention to make repairs and make a claim under the replacement cost benefits (I think most policies are 6 months for notification to the insurer of intent)

          All that being said, there are a lot of claims underpaid due to the insurer not following the policy in this respect.

          I feel like if a public adjuster or attorney were to advertise for people who never collected the depreciation on their claim, it would be found that a fair number of those people were slightly under-insured and would have been in a much better position had the insurer followed the policy and paid the RCV less the tiny amount of the co-insurance penalty, rather than having their claim depreciated at 50%.

          Please let us know your thoughts

          Steve

    • Edward Fako

      Good hearing from you again Stephen.

      Likewise, if you have time to share that policy, please feel free to send it to my email address below.

      Ed Fako
      InsuranceClaimappraisals@gmail.com

      Thank You In Advance.

    • Stephen Sarasohn

      I’d like to see that as well. The policies I’ve seen say the opposite. If the property is not insured to 80% of the RCV, the policy ONLY pays ACV or you get coinsured. w2zr@bellsouth.net
      If, at the time of loss, the amount of insurance
      in this policy on the damaged building
      is less than 80% of the full replacement
      cost of the building immediately before the
      loss, we will pay the greater of the following
      amounts, but not more than the limit of liability
      under this policy that applies to the
      building:
      (a) The actual cash value of that part of the
      building damaged; or
      (b) That proportion of the cost to repair or
      replace, after application of deductible
      and without deduction for depreciation,
      that part of the building damaged, which
      the total amount of insurance in this
      policy on the damaged building bears to
      80% of the replacement cost of the
      building.

      • Stephen Hadhazi

        Aloha,

        Here is a video that I had done a while back that discusses it:

        https://www.youtube.com/watch?v=JMHBnQV2EBY

        Here is an example of an HO-3 Policy. This specific policy is the HO 00 03 10 00. However, most of the ISO HO-3 policies would likely be the same. Many other policies would also contain similar language, as it is fairly standard.

        http://bit.ly/2JSuukr

        Steve

    • Stephen Hadhazi

      Aloha,

      Here is a video that I had done a while back that discusses it:

      https://www.youtube.com/watch?v=JMHBnQV2EBY

      Here is an example of an HO-3 Policy. This specific policy is the HO 00 03 10 00. However, most of the ISO HO-3 policies would likely be the same. Many other policies would also contain similar language, as it is fairly standard.

      http://bit.ly/2JSuukr

      Mahalo!

      Steve

    • Stephen Hadhazi

      The insurer cannot both depreciate and apply the co-insurance penalty.

      But, the point to my argument is a little different.

      The policy does not give the insurer discretion as to whether they apply the co-insurance penalty or apply depreciation to the claim. The policy must be followed.

      My point is that there are thousands of claims per year that are heavily depreciated, e.g. 50% and where the home is also under-insured just slightly less than the 80% insured-to-value. (Or whatever the co-insurance percentage is for that policy)

      This means that, had the insurer done a proper investigation of the claim, they would have realized that the home was slightly under-insured and then applied a tiny co-insurance penalty instead of the 50% depreciation.

      Of course, if the insured understood that they had depreciation coming back (many do not realize this), then they might still be better off collecting the depreciation later.

      We all know that many people do not ever collect their recoverable depreciation. Whether it is due to ignorance that it is even available to them or that they waited too long to inform the insurer of their intention to make repairs and make a claim under the replacement cost benefits (I think most policies are 6 months for notification to the insurer of intent)

      All that being said, there are a lot of claims underpaid due to the insurer not following the policy in this respect.

      I feel like if a public adjuster or attorney were to advertise for people who never collected the depreciation on their claim, it would be found that a fair number of those people were slightly under-insured and would have been in a much better position had the insurer followed the policy and paid the RCV less the tiny amount of the co-insurance penalty, rather than having their claim depreciated at 50%.

      Please let us know your thoughts

      Steve