Commercial property insurance is a critical aspect of protecting your business. However, it's often misunderstood or overlooked by business owners who may not fully comprehend their policies or speak with their insurance brokers about the coverage they have. This lack of understanding can be detrimental, as even a single claim could potentially damage your personal net worth if your property isn't insured correctly.
One aspect of commercial property insurance that frequently causes confusion is co-insurance. If you've ever come across this term in your policy or proposal and wondered what it means, then this article is for you. We will delve into the concept of coinsurance in a property policy and why it's essential to grasp its significance.
To put it simply, co-insurance is an incentive from your insurance company to encourage you to insure your building, contents, and business income limits accurately based on their replacement value.
The primary reason for doing so is two fold:
1. Accurate Claims Settlement: Underinsuring can complicate any claims process significantly. By ensuring that you have adequate coverage for the full replacement value of your assets, you increase the likelihood that claims will be settled accurately without unnecessary delays or disputes.
2. Premium Collection: Insuring for less than the replacement value also means paying lower premiums since premium calculations are typically based on the level of coverage chosen by the insured party. However, while reduced premiums may seem appealing initially, they can lead to severe consequences later on when filing a claim.
To maintain fairness within the system and hold all parties accountable (both insurers and insured), an insurer might include a co-insurance clause in their property policy—usually around 80%—which is common in non-standard insurance markets.
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Let's illustrate how co-insurance works through an example:
Imagine owning a masonry/non-combustible building with an estimated replacement cost of Rs 8 million but deciding to insure it for only Rs4 million. In this scenario, two things are happening:
1. The insurance company is collecting only half of the premium they should rightfully receive.
2. You, as the insured party, are taking a significant gamble that you will never experience more than a partial loss.
Now let's say there is a fire in the building resulting in Rs 2 million worth of damage. To calculate your reimbursement under the co-insurance clause, we use the following formula:
Reimbursement = (Insurance carried / Insurance required) x Amount of Claim
In our example, since you insured the building for Rs 4 million instead of its proper value (Rs 6.4 million), your reimbursement calculation would look like this:
Rs4 million (insurance carried) divided by Rs 6.4 million (insurance required) equals 62 and a half percent.
Multiplying this percentage by the amount of loss (Rs 2 million), we get Rs12,50,000—the amount reimbursed by the insurance company—minus any deductible specified in your policy.
Therefore, if you had chosen a deductible of Rs 5,000 on your policy, your final reimbursement from this claim would be Rs 1,245,000—a shortfall of Rs 755k that comes out of your pocket.
Understanding co-insurance is crucial because it highlights an alarming issue prevalent across commercial properties nationwide—underinsured values. Co-insurance exacerbates underinsurance problems further; however even without such clauses present in policies; remarkable risks exist when faced with large or total losses due to inadequate coverage.
So what's the solution?
The key lies in working closely with an experienced broker like BimaKavach who can help evaluate what assets need protection and determine their replacement costs accurately. By conducting thorough assessments and reevaluating coverage limits regularly based on evolving market conditions and asset values' fluctuations can better equip businesses against potential financial devastation caused by insufficient insurance coverage.
Consider seeking expert opinions outside traditional channels and engage in conversations with professionals well-versed in commercial property insurance. They can provide valuable insights and assist you in making informed decisions regarding your coverage needs.
