Why do I have to carry so much Insurance on my Commercial Property?

This is a great question, and one that customers ask often.

Your policy includes what is called a co-insurance provision.  Co-insurance is basically an agreement between you and the insurance company.  In exchange for your agreement to insure the property for at least a specified percentage of its actual value, the company agrees to issue the policy for a lower premium than it would charge for a policy without a coinsurance provision.  

After a loss – even a small loss – if the amount of insurance on your property isn’t sufficient to satisfy your part of the agreement, then the insurance company can reduce the amount it would normally pay.  For instance, if your insurance policy contained an 80% coinsurance clause, then you would be responsible to carry an amount of insurance on your property at the very least 80% of the value.  If you had a claim, and it was determined you did not insure the property for at least 80% of the value, your insurance company would reduce the amount of your claim proportionately to the percentage you carried.  

For example, suppose your commercial building was valued at $100,000, but you choose to only insure it for $50,000, which is half the actual value of the property.  If you were to have a claim for $10,000, you would only be paid $5,000 (half the claim amount) less any applicable deductible.  

However, if you insured the commercial building for $80,000 (80% of the building’s value) you would not be penalized and would receive a claim check for $10,000 less any applicable deductible.

Do remember though, a coinsurance clause should not be an enticement to insure your property for less than the actual value.  In the event of a total loss, the maximum amount the policy will pay for your property is the amount you insured it for.

While it is your responsibility to establish the value of your property and select the amount of insurance for your policy, we can help with that decision and explain what you can do to avoid a loss penalty. Call us today for a Austin commercial insurance quote at 512-518-6292.