News

Insurance to Value- Improper Valuation Could be Detrimental to Your Client

Having an adequately valued insurance policy in place could be the difference between your client staying in business or potentially going bankrupt. Underestimating the cost to replace buildings, contents and equipment is a costly mistake if there is coinsurance on the policy.   Building costs have increased over the years and many business owners underestimate the cost to rebuild. It is critical for your clients to have their assets properly valued for insurance purposes. Helping them to determine these values is just one opportunity that you have to offer them outstanding service.

Being Under-Insured

Many insureds try to get away with paying aslittle premium as possible. They think,“I have insurance”, but they don’t have enough to cover replacement costs or even the actual cash value (replacement cost less depreciation). This can lead to disputes between the insurer and the insured. This is where “co-insurance clause or penalty” ends costing the insured a lot more in the end.  They will often only become aware of this when the amount of their is far less than anticipated. 

Insurance companies use the co-insurance clause make certain that the insured pays a premiumthat closely reflects the replacement cost or actual cash value. The co-insurance clause specifies the percentage of the actual value of the property the insurance company will pay in the event of a loss. Insurance-to-value (or ITV) allows the insured full indemnification and also mitigates losses to the insurer.  

The Math on Co-Insurance

The formula for calculating the amount paid to the insured when the co-insurance clause applies is:

Amount Payable = Insurance Purchased / Insurance Required * Loss

The co-insurance clause specifies the required insurance amount and is usually 80-90% of the actual replacement cost.

For example, take a building that costs$200,000 to replace and the insurance policy contains a co-insurance clause of 80%. The insured only carries $120,000 on replacement cost on the building. A fire occurs and causes $80,000 worth of damage. How much will the insurance company pay? 

Using the earlier stated formula, divide the amount of purchased insurance ($120,000) by the insurance required (80% of $200,000 as stated by the co-insurance clause, which is $160,000). [160,000/120,000 = .75] This result, 0.75, is then multiplied with the loss sustained ($80,000). The result is $60,000. The insured is paid $60,000, less the deductible amount, for an $80,000 loss. If the insured had paid the insurance required ($160,000), they would receive full compensation. The $20,000 loss is the co-insurance penalty.

Being Over-Insured

It is also necessary to prevent over insurance. In cases where a client is over insured, the insured pays more in premium than is required to cover losses. As a result, your client is overpaying for insurance that they would receive back full limits in the event of a loss, assuming they are not in a valued policy state.  

A policy with 0% coinsurance may be an option in some cases to avoid coinsurance penalties. If you do find that your client only paid $ 40,000 for that 20,000 square foot building and they only want to insure it for what they paid for it, ask your Tuscano property underwriter for a 0% coinsurance quote. The building limit should be high enough to cover anticipated debris removal costs as well as the building itself. The current ISO form provides coverage for debris removal expense subject to 25% of the direct damage loss amount. An additional $25K in coverage applies if the direct damage loss and debris removal expenses together exhaust the limit of insurance.  

Property value is determined by some of the following factors:

• ISO construction class
• Square footage
• Building shape & configuration
• Number of stories & height
• Building age
• Occupancy
• Location
• Permanently attached equipment

Building values do not include land, increased costs due to ordinance or law (which often times can be bought back), debris removal and demolition costs. 

To prevent over insurance and under insurance, it is important that cost estimators are properly used to get the accurate current value of the insured property. Tuscano provides you with the e2Value tool to help you select appropriate limits for replacement cost or actual cash value on any submission that you send us to quote.  

Try out the e2Value tool for Commercial or Residential Properties*.

*Requires Internet Explorer