Insurance to Value: Explaining Co-Insurance
When your customers apply for an insurance policy, they are being proactive about protecting themselves against potential losses or damages to their property. What most may not realize, is that when they apply for insurance you, their broker, can also help them determine an adequate co-insurance clause.
What is co-insurance?
Co-insurance is a clause that ensures your customers’ property is evaluated appropriately to receive fair coverage in a claim situation. The property should be insured to the percentage of either the Replacement Cost or Actual Cash Value that is stated in the policy declaration pages, usually 80%, 90%, or 100%.
How does it work?
If your customer has insured their property to match the percentage in their policy, then they will receive more adequate or potentially full compensation, up to the amount of coverage subject to the applicable deductible or other limitations outlined in the policy.
However, if they choose to co-insure for less than what is stated, for example only 50% of the stated Replacement Cost or Actual Cash Value, then the insurance company would only be responsible for 50% of the loss in the case of a claim – making your customer responsible to pay out the remaining half.
The co-insurance formula
Here’s an example: The Replacement Cost or Actual Cash Value is $20,000 and your customer decides to co-insure for $18,000 (90%). They then experience a situation where they have to file a claim with losses and damages coming out to $12,000. Following the formula, they could be covered for $10,800 – depending on the coverage subject to the applicable deductible or any other limitations outlined in the policy, they will be covered adequately.
However, in this case if they had only co-insured up to 50% and experienced the same loss and damages coming out to $12,000, then, following the same formula, they could only be covered for $6,000. Nearly $4,000 less!
How can I help my customers understand?
We recommend explaining what co-insurance is and how the formula works to help them have a better understanding of the benefits. Having a co-insurance clause near the suggested amount can seem high at first, but in the event of a loss or damages, being proactive and insuring property as close to its true value as possible could save your customers in the end.