What is Co-Insurance?

Co-insurance is arguably one of the most misunderstood and confusing concepts in the insurance industry. Most commercial policies covering property (buildings, stock, equipment and business interruption) contain a co-insurance clause. It is important to be aware of your co-insurance clause requirements to ensure you have the proper level of coverage. Co-insurance is a clause found in commercial policies that aims to ensure that policyholders are insuring their property to an appropriate value. The co-insurance clause requires owners to insure to a stated percentage of the value of their property. The most common clause values are 90% for building stock/equipment and 50%, 80%, or 100% for business interruption. For example, a building valued at $1,000,000 with a co-insurance clause of 90% must be insured for no less than $900,000.

 

How does it work?

In the course of investigating and settling a loss, an adjuster will determine if you have purchased a sufficient amount of insurance to comply with the co-insurance clause requirement. The amount of claim received will be calculated based on the actual amount you insured for divided by the required amount of insurance multiplied by the amount of the loss. For example, if a property owner chooses to insure for less than the amount required by the co-insurance clause, the property owner is at risk and will receive less than the full amount of their loss.

 

Co-Insurance Formula

(Actual Amount Insured For / Required Amount of Insurance ) x Amount of Loss = Amount of Claim

Example:

Building value: $1,000,000
Co-insurance requirement: 90%
Required amount of insurance: $900,000
Actual amount of insurance: $600,000
Amount of loss: $300,000

(600,000/900,000) x 300,000 = $200,000

In this case the insurer would pay $200,000, leaving the owner responsible for $100,000 since they did not insure to the required co-insurance level. Being under-insured, or unaware of your insurance-to-value requirements, can be a disastrous mistake, and could impact the future of your business. Keep in mind that you can never collect more than the amount of your insurance. So in this example if you insured for 90% and you sustained a total loss ($1,000,000), you could only collect $900,000. This is why it is better to insure 100% of your property, rather than 90%.

 

All participants of the CRA Commercial Insurance Program will have their business operations reviewed annually by their Commercial Insurance Advisor. As part of the review, adjustments may be made to equipment, stock, building reconstruction or business interruption values. These changes are intended to ensure proper coverage in the event of a loss. We strongly encourage you to advise us if there are ever any material changes to your business, so that we can maintain proper amounts of coverage at all times.

If you have any questions relating to the limits of coverage within your policy or would like more information on the CRA Insurance Program, please contact our office.