Coinsurance penalties are the last thing policyholders worry about following a loss. My experience has been that many field adjusters fortunately do not go through the costly calculations to accurately determine if a structure is underinsured. Thus, the penalties from being underinsured do not arise as often as they could.

Insurance agents and brokers should be especially cautious with insurance to value calculations. They should explain the importance of insuring a structure to full replacement cost and explain the consequences for the failure to do so. From what most policyholders tell me, as well as my own experience, the discussion of insuring to value often goes something like this:

Agent: “Joe, we have to place on the application how much insurance you need.”

Joe Policyholder: “I just hope I can afford what you are about to quote me.”

Agent: “Well, how much is your building value if you had to replace it?”

JP: “I don’t know. How much did I have it insured for last year?”

Agent: “A little more than a million, $1.23 million. Have you made any improvements since last year?”

JP: “We added some computer wires, made a new conference room, and upgraded the air conditioning for our IT Department. I think all that would be around $200,000. Maybe we should add that amount to what we had from the year before? Didn’t the carrier send out a guy to look at the building? What did he say?”

Agent: “I cannot seem to locate it. Do you feel comfortable if I insured it for $1.45 million as the replacement cost? If you feel that is the right amount and can replace the property for that, I can get some quotes with cheaper premiums if you agree that you have insured to 90 percent or 100 percent of the full replacement cost value. You have to be sure about the amount of insurance or there ca be a penalty if we get this discount for you.”

JP: “Great. Gosh, I didn’t know we could save money just by insuring to the full replacement cost. Fantastic! Thanks.”

Now, most agents reading this will say they go into far greater detail. Many do, and I have seen a number of in depth discussions and proposals fully explaining everything. But, I have also been in clients’ offices while the insuring value is discussed. Often, my hypothetical is not far off from what I have heard. Policyholders want great coverage at great prices. Many agents simply want sales. Sometimes, both choose to ignore the small details of exactly how the product works and the grave importance of insuring properly because price is higher and agent shopping may ensue.

Christopher Boggs, a CPCU, wrote an excellent article last week, Applying Coinsurance to Homeowners’ and CPP’s, that is simply a must read for agents and brokers because of his warnings regarding possible claims of errors and omissions claims. Policyholders and adjusters can also learn a lot from it as well. The possible claims against agents for leaving policyholders with a 100 percent coinsurance policy could not be clearer:

“The commercial property policy allows the insured the option to use 80%, 90% or 100% coinsurance. As the coinsurance percentage increases, the property rate (or loss cost) decreases. But should 100 percent coinsurance be used?

From an errors and omissions perspective, probably not; using 100 percent coinsurance leaves no room for an incorrect calculation which requires the insured to always have 100 percent of the value in force. Even attaching the inflation guard endorsement may not give the insured adequate coverage at the time of the loss.

Commercial property policy insureds also have the opportunity to write all property coverage under a blanket limit of protection. Blanket limit policies are the preferred method when the insured is trying to avoid undervaluing a particular class of property or a particular property location (especially if there are several properties or contents moving among several buildings or locations). However, use of a blanket limit requires the minimum coinsurance percentage be increased to 90 percent.
…
But, as stated above, even though the property is valued at 100 percent of its TIV, do not increase the commercial client’s coinsurance to 100 percent (even though there is a slight premium break). Use 90 percent to avoid most miscalculation problems and allow some room for an unexpected increase in replacement cost.”

This is excellent advice. It is very difficult to accurately estimate the replacement cost of a significant structure. Even bids for construction can wildly vary. How much should anybody really bet on any one estimate getting the replacement cost just right?

Another useful tip was to use “agreed values:”

“One approach CPP insureds can employ to avoid the application of coinsurance is "agreed value." As the name suggests, the agreed value is the value the insured and the underwriter agree the property is worth. Attaching the agreed value endorsement suspends the coinsurance provision for one year. At the end of the year, a new schedule must be submitted and a new agreement reached.”

The last thing a policyholder wants is to have a loss. Having a loss where the claim is not paid in full will undoubtedly cause issues about why enough insurance was not obtained. My view is “safe is better than sorry.” I suggest when it comes to coinsurance, it is the best policy.