GOTCHA …. Many property insurance policies have “co-insurance” as part of the limit of the replacement cost coverage. What does this mean and how will it affect me?

Unlike health insurance, in a property policy, co-insurance does NOT mean that the insurance carrier will pay the stated percentage and you will assume the remaining.  What it DOES mean is that you must have your coverage limits be within a set percentage of the Actual Replacement Cost at the time of loss or you will face a costly penalty… GOTCHA when or if you have a property claim.

Scenario:  A+ Auctioneer has not updated his property limits in over five years. His policy still has the original Building limit of $100,000, replacement cost (RC), at 80% – 20% co-insurance and $5,000 deductible. There was a fire recently and the building sustained damage valued at $45,000.  The insurance appraiser determined that the value of the building had increased over the last four years and is now valued at $150,000 for RC.  Here is how this insufficient limit will impact the payout:

Insurance limit $100,000 divided by Current Replacement Cost Value $150,000 = 66%

This 66% means that the building is currently insured at 66% of the replacement cost  value and therefore, because it does not meet the 80% co-insurance threshold, this factor (66%) will be used to determine how much the carrier will pay.  

Damage value $45,000 x .66 = $30,000

The value of $30,000 is all that the carrier will be responsible for…but wait, there’s more!  A+ Auctioneer has a $5,000 deductible!

$30,000 less the $5,000 deductible means that when all is said and done, the carrier will only pay $25,000 of the $45,000 in damages. What this means to you is that rather than just paying a $5,000 deductible, you are having to pay the co-insurance “penalty” of $15,000 as well. GOTCHA!

This is a lot of math and can be confusing, so the summary is this:  Your property was only insured to 66% of it’s value and because of this, only 66% of the claim (before your deductible) was paid.  Property values have been rising and what your property was valued at a few years ago may not be reflective of what it is currently valued at in today’s higher than normal real estate market. It can be tempting when you are super busy to just let your policy renew as is and not re-visit your limits, but when you are under-insured, you are essentially self-insuring the difference.

In conclusion, make sure that you update your property values on an annual basics. This applies to all Property and Casualty policies, both commercial and personal lines.  Replacement cost is not the value you paid for the property or the current market value.  It is the cost to rebuild the property and with today higher rate of inflation, it could be much more than you think.