Coinsurance: what businesses need to know
You may be familiar with coinsurance in terms of health insurance and workers’ compensation policies. In these cases, coinsurance means that the insurance company and the patient share the costs of the medical procedures. Business coinsurance is different and relates to the coverage of property and assets of a small business. Here is how coinsurance works for business insurance.
What is coinsurance for businesses?
Coinsurance clauses in small business insurance policies apply primarily to commercial property, including vehicles, buildings, and office equipment. The coinsurance clause describes the percentage of the property’s value that a policyowner must insure to receive payment for a claim.
Why do insurance companies offer coinsurance?
With a coinsurance clause, the insurer knows you have adequate coverage if you need to make a claim. Coinsurance protects the ability of the insurance company to pay policyholder claims, assist with underwriting, and determine insurance premiums.
The insurer applies coinsurance rates to business property or business income. This percentage rate depends on the value of the property covered by the policy owner’s plan, such as the actual cash surrender value (ACV) and replacement cost value (RCV).
Is coinsurance different from a deductible?
Coinsurance and deductibles are different things. The coinsurance is a percentage of the cost sharing between the policy owner and the insurer. On the other hand, a deductible is a predetermined amount listed in your policy. Each time you file a claim, your insurer subtracts the amount owed to you from the deductible until the deductible amount is met or exceeded. Check your policy’s reporting page for details, call your insurance agent, or ask the insurer during the process of choosing a business insurance provider if you have any questions.
How does coinsurance work on commercial property?
Suppose an insurer requires the amount of insurance you purchase on a property to be 80% of the property’s value to adequately cover replacement costs.
In this example, the insurance limit would be 80% of the value of the property. If you fail to meet this required amount of coverage and file a claim for damaged property that exceeds the coverage limit, you will have to pay a penalty to compensate for the inadequate insurance.
Check your policy for the specific coinsurance percentage requirements associated with the value of your property and any penalties the insurer may impose.
What is a 100% coinsurance clause?
When you look at the policy options, it may seem that most property insurance options involve coinsurance where each party shares a percentage of the claim. Although this is a valid assumption, it is not always the case.
Under a 100% coinsurance clause, the business owner must insure 100% of the value of the property. Policy premium costs are generally lower because the insurer does not take the same amount of risk as with an 80% policy, in which the insurer would have to pay 20% if a claim is filed.
However, business owners should consider two things:
- You risk underinsuring the asset if it appreciates in value after purchasing the policy. Think about increasing stocks of commodities, like coffee, or earth, like real estate.
- If the increase in asset value is not accurately recorded (such as a property that increases from $ 100,000 to $ 160,000) and the property’s value is in fact above the policy limit (for example, at $ 100,000 for a 100% coinsurance clause), you may be required to pay the uninsured shortfall. In this example, it would be $ 60,000 (less the deductible) if the property is fully damaged, since the $ 100,000 policy only covers 70% of the property valued at $ 160,000. The cost of this underinsured property could outweigh the premium savings under a 100% coinsurance policy.
Fortunately, there are several options for business owners who want to avoid penalties.
What is a co-insurance penalty clause?
A coinsurance penalty clause, often found on the insurance policy report page, penalizes the policy owner for not having sufficiently insured the property. These clauses require that you purchase a specific amount of insurance based on the value of the goods covered.
How to avoid coinsurance penalties
There are several ways that policyholders can avoid coinsurance penalties.
Agreed value for business property insurance coverage
The agreed value is often a more expensive hedging option. Under this option, you and the insurer agree on the total value of all your physical assets or property. The limits of the policy must be equal to the agreed value.
The agreed value specifically requires a statement of real estate values that you submit to the insurance company before the policy is issued or renewed each year. You must comply with all stipulations defined in the policy to avoid a coinsurance penalty.
For example, if your coffee stock is currently costing $ 2,000 to replace, you should insure for at least 100% of the agreed-upon value at $ 2,000 to avoid a shortfall and a coinsurance penalty if your stock (price of the commodity) increases in value at that time. of loss.
Here is the formula for the agreed value:
% coinsurance x estimated net income and expenses for the period specified by the insurer = agreed value
Approved value for business income insurance
The approved value for business income insurance works the same way as the approved value for property insurance. However, in this case, since business income insurance replaces lost income, you must submit a business income spreadsheet showing the projected income and expenses of your business during a specified period. by the insurance company. You must submit this information before the policy is issued or renewed each year.
Advice: Review your policy report page and contact your insurer for details on accounting and required documents.
Reporting and value accounting
While the savings on premiums for this option are often minimal, accounting for value reports makes sense for companies with inventory levels that fluctuate throughout the year. This means that the policy amount and the premium adjust according to the fluctuating asset value.
The insurer generally determines the premium on the basis of this formula:
Business value ÷ $ 100 x insurer premium rates
Here are some key points to consider:
- There are generally two premium rate options: monthly and annual.
- Your company, as the policy owner, will be responsible for reporting inventory levels to the insurer during the designated period of each month.
- If the inventory exceeds the level of value declared in the most recent period before the loss, you may have a coverage gap. If your insurer finds that you haven’t reported specific inventory levels, it could have serious consequences for you as the policy owner.
Now that you understand coinsurance with property insurance coverage, work with your business accountant or insurance agent to see which plans and options are best for your small business. Read the details and specifics on your returns page and make sure you understand the costs associated with business insurance.