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Property & Casualty Insurance/100% coinsurance vs 80% coinsurance

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QUESTION: I understand some of the coinsurance principals in payments on partial claims with underinsured properties. However, many kind people on the internet answer only part of each scenario then change the scenario entirely to answer another question. I would like an explanation for the following scernarios, all using apples to apples on each as described. Can't wait to hear back.

1. 80% coinsurance on a property insured for $200,000 (current replacement value) and a partial claim made of $50,000. And the same but current replacement cost at $225,000

2. 80% coinsurance on a property insured for $200,000 (current replacement value) and a total loss claim made. And the same but current replacement cost at $225,000

3. 100% coinsurance on a property insured for $200,000 (current replacement value) and a partial loss of $50,000.  And the same but current replacement cost at $225,000

4. 100% coinsurance on a property insured for $200,000 (current replacement value) and a total loss claim made. And the same but current replacement cost at $225,000

I guess this is really 8 questions but I need all 8 scenarios to fully assess the positive and negative of both 80% and 100%. And it appears that there are advantages and disadvantages to both depending on values, loss amounts and premiums. I am so excited that someone exists who can help me with this. I am quite bright and hope I was specific and clear enough to assist you to properly answer the questions. Thank you so very much for doing this and I can't wait to hear back from you. I am the president of a HOA for a condo complex and am in charge of insurance management. This means a great deal to many people. Thank you again.  Donna Lynne

ANSWER: Hi Donna,

I'll answer each question, but first two things:

1)you should understand the 'Coinsurance Equation', which is ->  Amount Carried/Amount required x Loss = Settlement

2) When you make a policy subject to 100% coinsurance, a lower property rate applies compared to 80% coinsurance#  So the pricing can be more competitive with 100% coinsurance, but you better make sure you are insured to 100% of the Replacement Cost (RC)

OK, here we go#

1)  You have told me that the 100% Replacement Cost (RC) is $200,000, and the claim is subject to 100% coinsurance.  So the minimum amount of insurance required to avoid a coinsurance penalty is 100% of the RC, or $200,000.  Since the amount of insurance carried meets or exceeds the required amount (200K), there would be no coinsurance penalty, and the $50K claim is paid in its entirety.  At an RC of $225,000 and subject to 80% coinsurance, the minimum amount of insurance required to avoid a coinsurance penalty is 80% of $225K, or $180,000.  Since the amount of insurance carried meets or exceeds that minimum (Hence meeting the coinsurance clause), there is still no coinsurance penalty and the claim is again paid in full.

2) Since in both instances the amount of insurance carried meets or exceeds the amount required (80% of the RC), the claim is paid in full - $200,000. (As $200,000 is the limit on the policy)

3) You have told me that the 100% RC is $200,000, and the claim is subject to 100% coinsurance.  So the minimum amount of insurance required to avoid a consurance penalty is 100% of the RC, or $200,000.  Since the amount of insurance carried meets or exceeds the required amount (200K), there is no coinsurance penalty, and the $50K claim is paid in its entirety.  At An RC of $225,000 and subject to 100% coinsurance, the minimum amount of insurance required to avoid a coinsurance penalty is 100% of $225K, or $225,000.  Since the amount of insurance carried DOES NOT MEET that minimum, you would simply plug the numbers into the coinsurance equation. Here's what that looks like:  $200,000/$225,000 x $50,000 = $44,444.

4) You have told me that the 100% RC is $200,000, and the claim is subject to 100% coinsurance.  So the minimum amount of insurance required to avoid a consurance penalty is 100% of the RC, or $200,000.  Since the amount of insurance carried meets or exceeds the required amount (200K), there would be no coinsurance penalty, and the $200K claim is paid in its entirety.  At An RC of 225,000 and subject to 100% coinsurance, the minimum amount of insurance required to avoid a coinsurance penalty is 100% of $225K, or $225,000.  Since the amount of insurance carried DOES NOT MEET that minimum, you would simply plug the numbers into the coinsurance equation. Here's what that looks like:  $200,000/$225,000 x $200,000 = $177,777.

Some additional points - In no event will you get more than the amount of insurance you carry. Lastly, ask your agent to waive coinsurance.  It is done with an 'Agreed Amount Endorsement', which effectively says: 'We the insurance company agree that the amount of insurance you carry meets or exceeds the amount required by the coinsurance clause'.   If you use this, AND keep the coinsurance percentage at 100%, you will still get a lower property rate AND not have to worry about a coinsurance penalty.

Lots of stuff here, feel free to follow up with me with any questions.

James Berliner

---------- FOLLOW-UP ----------

QUESTION: Thank you so much, James. You did an excellent job. I just have a few more questions to clarify this completely.

1. When, exactly,is the RCV (replacement cost value) run by the insured?

2. Can an insured run an RCV 3 times if you make 3 claims within a policy effective period?

3. Suppose you have a 100% coinsurance and RC is $190K, a total loss of $200K, $200K insurance and make claim #1 in January. How much is paid? Then suppose all the same and you make a partial loss claim of $10,000 in October? Both scenarios take place in the same coverage year. How much is paid?

3. Then suppose the exact same hypotheticals as above but you have an 80% coinsurance policy?? How much is paid at each time above?

4. Are some insurers calculating the partial payments at 80% even when you have 80% or more coverage?

5. Why ever carry more insurance than 85-90% when you have an 80% coinsurance clause?  

The only reason I can see to carry more coverage is when you have a 100% coinsurance policy. There seems to be no purpose in carrying more coverage if you will never get the full pay out in the event of a total claim.  And the chances of a total claim seem slim. It seems that the only risk is if construction costs drastically increase during a coverage year and you suffer a loss at that precise time. What about just carrying a little more coverage on a 100% policy instead? Are the premiums for 80% and 100% very different or just a little?

Thank you and I look forward to hearing back from you.  Have a great day.

Answer
Hi Donna,

Apologies if this answer comes late...I never was notified I had a question pending!

OK, here we go:

1. The RCV SHOULD be determined by the insured and carrier at the beginning of the policy, but under all circumstances it will come under the microscope after the claim, during the adjusting process.

2. Again, the RCV is determined by the carrier during the claim adjustment process. The insured can adjust their own coverage limit at any time during the policy period.  It is up to the insured to make sure they have the correct amount of insurance to avoid a coinsurance penalty at the time of loss.

3. There is a fault in the question.  If the RC of the building is 190K, in theory you cannot have a 200K loss.  But using the facts of the questions, $190K is paid for the first claim as that is the policy limit and the insured carries enough insurance to avoid a coinsurance penalty.  Assuming all repairs are made after the loss, $10K will be paid on the second loss.  The amount of insurance is on a 'Per loss' basis, and there is no aggregate in the policy.

3. (You have two questions numbered '3') - Same answer as above.  As long as the coinsurance clause is met, the claim is paid in its entirety. There is no aggregate limit in the policy.  Aggregate limits are found in General Liability policies.

4.Partial payments (payments less than the actual loss sustained) are only made when the amount of insurance carried is not high enough to avoid a coinsurance penalty

5. Why carry more than 85-90% of RC?  If you have a 1MM building, and you only carry an amount of insurance equal to 85% of the RC, then in a total loss (assuming you meet the coinsurance clause with enough coverage) you are only getting $850,000 to re-build your 1MM building.

I advise my clients to ALWAYS carry an amount of insurance that will allow them to replace a building in the event of a total loss.  After all, isn't that the reason people buy insurance? Just look at the news every day - there is always a burn-down in the news, and if you insured to 100% of your value your building gets re-built. If you insured to 85% of your RC value, you are kicking in the other 15% - perhaps an amount the policyholder cannot afford.  

The higher the coinsurance percentage carried, the lower the property rate.  

Make sure the policy contains an 'Agreed Amount' endorsement that effectively waives out the coinsurance clause.

James Berliner

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James R. Berliner, CPCU

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My specialty is personal and busines insurance, relating to the property and casualty field. Homeowners, Auto, Business Auto, Workers Compensation, Business Interruption, Crime, Directors & Officers Liability, Employment Practices Liability, Professional Liability, General Liability, Umbrella Liability, etc.

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I am the owner of my own agency (established 1970), have obtained my CPCU designation, and am licensed in many states.

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IIABA (Independent Insurance Agents and Brokers of America), CPCU Society, PIACT (Professional Insurance Agents of Connecticut - Board of Directors)

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