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Mastering Co-insurance to Mitigate Risks in a Hard Market

By May 10, 2024May 11th, 2024No Comments

Most homeowners and companies know that property insurance rates are rising in this “hard” market over the past few years. Navigating co-insurance challenges shows that hard markets come with increased premiums, increased deductibles, and stricter coverage terms. Catastrophic property losses from weather events are becoming more frequent, and the dollar amounts per loss continue to rise, forcing insurance companies to re-evaluate their property insurance portfolios. At the same time, the cost to rebuild properties has increased dramatically due to rising construction costs for material and labor. Additionally, replacement costs on an insurance policy might be significantly higher than the market/retail value of the property. Now more than ever, property owners need to review their property coverage limits and make sure they are carrying adequate limits to avoid a co-insurance penalty, truly navigating co-insurance challenges.

What is Co-insurance?

Co-insurance is a requirement by insurers stating that a policyholder must insure their property for a specific percentage of its full replacement cost, often 80%, 90%, or 100%. If the limit of insurance does not meet the required threshold, the policyholder incurs a penalty in their loss recovery, underscoring the importance of navigating co-insurance challenges.

How does Co-insurance work?

Take a policyholder who owns a building with a replacement cost of $1,000,000 and a co-insurance clause of 80%. This means the policyholder would need to insure the building for $800,000 to avoid any co-insurance penalty. In the event of a loss, the policyholder would be paid the full loss amount, minus any deductible, up to the limit shown on the declaration page ($800,000). For this example, if the policyholder only carried $700,000 of property coverage, they would have to share in any losses since they did not meet the 80% (or $800,000) threshold. The amount they are reimbursed would use the following formula; (insurance carried / insurance required) x loss – deductible = loss payment. Assuming the loss was a partial loss totaling $400,000 in damages with a $2,500 deductible, the payment would be $347,500. As a result of being underinsured, the policyholder shares in this loss for $52,500.

Common Misconceptions About Co-insurance

Many property owners harbor misconceptions about co-insurance, which can lead to costly mistakes. One common misunderstanding is the belief that co-insurance only affects large claims. In reality, co-insurance impacts any claim once the insurance carried is less than the required percentage of the property’s replacement value. Another frequent error is assuming that the market value of a property is the same as its replacement cost. This often results in underinsurance, especially in markets where construction costs have escalated rapidly.

Effective Management of Co-insurance Risks

To manage co-insurance risks effectively, it’s vital to:

  1. Regularly Reassess Property Values: As market conditions and replacement costs evolve, so should your coverage. Annual reviews with your insurance agent can help ensure your coverage matches current values, a key part of navigating co-insurance challenges.
  2. Understand Your Policy: It’s crucial to fully understand all the terms and implications of your co-insurance clause. Misunderstandings can lead to unexpected financial losses when a claim occurs.
  3. Consider Professional Appraisals: Sometimes, professional appraisals are necessary to accurately determine the replacement cost of your property, ensuring that your coverage is neither too high nor too low.

Review Your Coverage Limits

Confirm whether a co-insurance provision is included to avoid sharing in a loss due to being underinsured. You can also ask your insurance agent to have the insurance carrier agree to the coverage limits (“Agreed Amount” coverage), waiving any co-insurance penalties.

Stay Protected, Stay Informed

Understanding co-insurance complexities doesn’t have to be overwhelming. By staying informed and proactive, you can ensure your property is adequately covered and safeguard against potential financial risks. Reach out to DSP Insurance Services for expert advice tailored to your unique needs. Stay protected, and let us help you manage the challenges of today’s insurance market.

Mike Pohl