Coinsurance: Why you might not be covered for as much as you think

Many of our best clients come to us with policies that have coinsurance and it’s an unspoken and uncommunicated loophole that is in a lot of insurance policies that clients might not otherwise understand but could lead them a path to being underinsured and a slew of headaches for an agency and an insured.

I recently stumbled across an article of an agency that was notified by an insured that they had over $100,000 in business property and on top of that at least $50,000 in tenant improvements for their space. The agency in this article insured the risk with $100,000 of coverage with a 90% coinsurance clause. Not only did they fail to properly insure the client for the amount of disclosed property and TI coverage necessary they included a clause for 90% coinsurance. So what does this all mean for the insured?

Coinsurance in a commercial insurance policy is very similar to coinsurance for your medical insurance. It’s a portion of the coverage the insured is responsible for in the event of a claim. In this particular case giving someone $100,000 of coverage with 90% coinsurance means they are going to self insure 90% of that $100,000 of coverage and effectively leave the insurance company on the hook for only $10,000 (10%) of that $100,000 coverage.

This can catch many people off guard and many agents fail to explain this feature to their insurance clients properly, if at all.

In the article, this coinsurance clause left an insured receiving $16,000 on a $260,000 loss. Imagine being the insured and thinking you are completely protected for at least $100,000 (while still less than it should have been) and find out your agent was not doing something that was completely up to par or had not communicated this fact to you adequately. The reality is that many insurance policies in the commercial world have this clause in them and many people accept these terms to keep rates lower, but effectively it makes you self insured for major losses and most companies and business owners cannot sustain these losses.

Additionally, this insured’s landlord sued them for not having adequate insurance coverage per their lease agreement so the insured was hit with a double whammy! Ultimately the agent’s errors and omissions paid this claim as the court placed the burden of proof on the agency to show they had explained this to the insured and the agency failed to provide such proof so they had to side with the insured to protect the consumer, but had they provided this proof the insured would still have been on the hook for nearly $245,000 worth of losses out of pocket. Pretty scary to imagine as a business owner myself.

This can be a vital lesson to agents but also a bigger lesson to insureds to watch out for coinsurance and understand your policies better. While the majority of us never experience claims at this level, the reality is that these claims happen more often than people think and insurance is what is protecting your business and its cash flows from these types of claims.

If you would like to read the article and learn more here is the link: