Many commercial property and equipment floater policies have a coinsurance condition. This is used by these insurance carriers to create accurate rates by making an incentive for policy holders to insure the property for the correct amount. It is important to understand how the coinsurance condition works and know what it is on your policies.

The coinsurance condition requires the insured to carry insurance equal to a specified percentage of the actual cash value or replacement cost value of the covered property. As long as this condition is fulfilled, the insured will be paid in full for any covered losses up to the limit of insurance. However, if the coinsurance condition is not fulfilled then the loss payments will be reduced proportionately. The following formula calculates the loss payment amount:

Loss Payment = [Amount of insurance carried / Amount of insurance required] x Loss

For example:

ACV of Building/Equipment is $100,000
Limit of Insurance is $60,000
Coinsurance Percentage is 80%
Amount of loss is $40,000
Amount of insurance required is 80% x $100,000 (ACV of Building/Equipment)

Loss Payment = [60,000 / 80,000] x 40,000 = $30,000 (minus any deductible)

As you can see from this example; fulfilling the coinsurance condition is very important for minimizing risk and exposure. To receive full payment for the loss the building or equipment has to be covered for at least $80,000. Since the limit is only $60,000 your loss payment will be reduced proportionately. That is why in this example only $30,000 is recovered on a loss valued at $40,000.

Please review your current policies to find out the coinsurance percentage on your policy. These can range from 60 to 125 percent. It is important to insure the property for the full value and use the coinsurance clause as a buffer for inflation, changes in building costs, bad appraisals, and other things that could arise. This will help avoid any coinsurance penalties that could result in a claim situation. We would like the opportunity to review your current policies and offer comparative commercial property or equipment floater quotes.

The Agent Articles section of BearWiseLandscapers.com allows our insurance agents to provide practical information for landscapers. These agents can also obtain quotes and establish a custom insurance program for your landscaping business through our access to a variety of insurance carriers. This agent article is filed under 3 Equipment Floater, 9 Commercial Property, and you can follow comments to it through the RSS 2.0 feed. Feel free to leave your own response below: