When you take out a commercial insurance policy for your business in Edmonton, you can anticipate a co-insurance clause (or clauses) to be included in the policy wording on property such as buildings, contents, stock or equipment, mobile equipment, tools and business interruption. If you file a claim and it is determined that you are underinsured, a co-insurance penalty can be applied which will reduce the amount of payment you receive in addition to your deductible. Your deductible and co-insurance penalty reduce the total insurance payment to you.
Co-insurance is a policy provision contained within an insurance policy, enforceable by law. It limits or reduces the amount payable to you in the event of a loss if it is determined that you are underinsured. If you do not insure your property or business assets to a required level, usually 80-100% of its value, a co-insurance penalty will apply that will reduce the amount of the claim payable to you. Co-insurance does not apply to property or business assets that are insured to current replacement cost value or in the event of a total loss.
The Purpose of a Co-insurance Clause
The purpose of a co-insurance clause is to encourage policy owners to insure their property to an appropriate value. It only penalizes you if you fail to have the proper amount of insurance in place when making a claim.
How It Works
In the event of a loss, you, as the policyholder, will need to make a formal claim to the insurer. If you did not purchase an adequate amount of insurance for the value of the property, then your claim is subject to a co-insurance penalty which could have a serious financial impact on your company.
For instance, a building valued at $1,000,000 replacement value with a co-insurance clause of 90 percent must be insured for no less than $900,000. If you choose to insure the building at a lesser value than what it is worth, then you agree to retain part of the financial risk associated with a loss instead of being fully compensated.
The formula for coinsurance is a follows:
(Amount of Insurance Carried / Replacement Cost Value of Property Insured) x Amount of Loss = Amount Paid
A customer insures their property for $500,000. After a fire loss of $100,000, it is determined that the replacement cost value of the property insured is $1,000,000 not $500,000. A 90% coinsurance clause would apply as follows:
($500,000 Amount Insured / $1,000,000 Replacement Cost Value) x $100,000 Loss = $50,000 Amount of loss paid to Insured
As the above example shows, the customer must pay 50% or $50,000 of the loss as they carried insufficient limits of insurance and failed to meet the provisions of the coinsurance clause. In order for the full amount of the loss to be paid the Insured would have had to carry 90% of the replacement cost value of the property or $900,000.
It is therefore extremely important to maintain adequate limits of insurance at all times. Should you make additional purchases or acquire more property throughout the year please contact your Insurance Broker to ensure you are adequately covered.
Determining the Value of a Claim
In arriving at a claim payment amount, the insurer must determine the claim value first. The value of an insured property, asset or service at the time of a loss may be determined by original receipt, business records, replacement cost, appraised value, or an expert’s report.
Where to Find the Co-Insurance Clauses
Co-insurance requirements are indicated as a percentage on the declaration page of your insurance policy, which has a list of coverages and the values you agreed to with your insurance broker. However, co-insurance clauses could also be found in the optional coverages in the body of the terms and conditions.
You may find a number of co-insurance clauses within the insurance policy for your business in Edmonton. The building, equipment, stock, business interruption and other related coverage can have different co-insurance percentage requirements.
Rights of the Policyholder
As the policyholder, you are protected by the Insurance Act of Alberta in the event there is no consensus over the calculation of the co-insurance penalty imposed by an insurance company. A dispute resolution procedure is available to you. You can submit expert reports and appraisals that support your claim calculations. The calculation of dollar value in the event of claim can be quite complex, however, and may require expert appraisers, accountants and other professional services.
Speak to an Insurance Broker in Edmonton about your Coverage
As a business owner, you should seek the advice of a qualified business insurance broker in Edmonton to determine the appropriate coverages and necessary limits that would best protect your business interests. Regular and timely communication with your insurance company will help to ensure that your business is insured to the appropriate value.
Contact us online for a free quote or by phone at 780-436-7880.