The wording of a Coinsurance commercial property policy effectively asks a simple question: Is the Required Insurance value greater than the Limit of Liability? If the answer is “yes,” there is work to do to impose a Coinsurance penalty. If the answer is “no,” the loss will be paid without penalty, subject to deductibles, limits and so on.
Of course, that simple question will not be found verbatim within the policy. Instead, the policy says, (with liberally paraphrased sections in braces):
“We will not pay the full amount of any loss if (emphasis added) the [Required Insurance] is greater than the Limit of Liability for the property. Instead, we will determine the most we will pay [by dividing the Limit of Liability by the Required Insurance, then multiplying the amount of the loss by that fraction, after which, we will subtract the deductible from that product. Then we will pay you the remainder] or the limit of insurance, whichever is less.”
We find ourselves 150+ words into this post having used “Required Insurance” three times without defining it. Required Insurance is: “…value of Covered Property at the time of the loss multiplied by the Coinsurance percentage from the Declarations”
How Does Coinsurance Work on Property Insurance?
The Coinsurance percentage in the above definition is typically 50%, 60%, 70%, 75%, 80%, 90%, or 100%. A carrier may limit the options to the insured, but the insured is free to choose a percentage from those made available. There are a myriad of reasons an insured would select something other than 100%; a subject for another day. Those reasons are not germane to the application of the Additional Condition of Coinsurance in a loss measurement setting.
The valuation, be it Actual Cash Value (ACV), Replacement Cost Value (RCV), Selling Price or other, is also driven by decisions made when the policy is purchased. The valuation method used for Covered Property to drive the Coinsurance penalty should be consistent with valuation method of the total amount of the loss.
On occasion, Covered Property at RCV and the total gross loss at RCV yield a penalized loss measurement that is less than Covered Property at ACV and the total gross loss at ACV would yield in a penalized loss measurement. The insured likely has the option to pursue an ACV-based measurement to maximize its recovery.
The Investigative Accounting Group of Meaden & Moore is experienced in such matters and is ready to assist.