Over the past number of years many of you in the insurance buying world have been seeing a pressure that causes the value of properties to increase. Insurers have been automatically adding an inflation rate to the limits on your property policies to press limits upward, incrementally, year after year. This is done with the hope that insurance to value is achieved and maintained.
During the conversations that we have with our clients at renewal time we often hear concern expressed that possibly this pressure is designed to help insurers charge more premium, but that it has no real purpose in the underwriting world nor benefit to the person buying the insurance policy. It is generally at this time that we, as brokers, attempt to mystify our clients with talk of Insurance to Value, Co-Insurance clauses and the horrors of being underinsured in a claim situation.
Being over insured is not good. Being under insured is not good either. Finding the true replacement cost of property is that “just right” moment we in the insurance industry are seeking on behalf of our customers.
If you over insure; if you have too much limit for what you actually have - during a claim an adjuster will ascertain the true value of what you owned at the time of your loss and they will tell you that you were over insured and the insurance company only owes you what you had prior to the loss. So if, for simplicy’s sake, you have property that is worth $800,000 and it is insured for $1,000,000 when an insured peril destroys it, you will have overpaid premium based on the $1,000,000 and will only realize a rebuild/replacement of $800,000 once the smoke clears and the dust settles.
Conversely, if you have property that is worth $1,000,000 and it is insured for $800,000 when a loss occurs, you become a “co-insurer”. You essentially end up covering, out of your own pocket, 20 percent of the total loss in this particular case. And this rule applies even in a partial loss. The “co-Insurance clause” dictates that you are a coinsurer to the extent to which the property is underinsured.
You may have noticed terms like 80% Coinsurance, 90% Coinsurance, 100% Coinsurance and Stated Amount on policy documentation in the past. In brief, if you have an 80% coinsurance clause, you can actually safely be underinsured on your property limits by 20% without being penalized in a partial loss. So with our example above, being insured to $800,000 on a $1,000,000 property will not result in your having to participate on a partial loss. 90% allows for a 10% underinsured circumstance without penalty and 100% dictates that if insured to value is not in place, there is an immediate participation on a partial loss. Stated Amount requires a document to be signed indicating the property is insured to an established and reported amount and that amount is the correct limit. Also, the stated amount statement requires that there has been an attempt to ascertain that the value indicated has indeed been substantiated by appraisal. In all cases, the maximum you can expect in any loss is the policy limit indicated.
This is only one paragraph to attempt to explain what many in the insurance industry can trip on is in no way a proper explanation, so please ask your insurance professional to explain coinsurance in detail.
Admittedly, there are a number of reasons that we see being used to rationalize not being insured to value:
• Attention may not been given to ensure property is insured to the correct amount.
• The conversation about insurance to value and coinsurance may never have happened between broker and client
• The theory is maintained that 100% of the property could not possibly be lost so why insure for the full amount. A false economy for sure.
• A real-estate assessment or a city assessment of value is used rather than a construction rebuild appraisal or a depreciated value is used rather than a replacement cost valuation.
Maybe you have seen your limits go up because of the inflation increase that the insurer is using at renewal. Unfortunately, this approach to dealing with the insurance to value issue is not always the most accurate way to make certain you are properly covered. That is why it is always so important to talk to an insurance professional on an annual basis to make certain insurance to value is achieved, and if it is not, to at least have a realistic awareness of what it means to be a coinsurer on your insurance policy when a loss occurs.
Not too much, not too little – just right – insurance to value.
Tim Tokrud has been a partner at Gifford Associates Insurance Brokers Inc in Ottawa since 2008 and has worked within the insurance industry since 1988.
He can be reached at tim.tokrud@giffordassociates.ca
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