This is because insurers apply a co-insurance clause to safeguard themselves against clients who understate their property value to obtain lower premiums. Protect yourself from the consequences of this practice by ensuring you declare accurate property valuations when sourcing insurance coverage.
The issue of underinsurance has intensified due to the impact of inflation over the last two years. If a property owner does not adjust their insurance coverage to account for inflation, they will be severely underinsured. Factored together with the effect of the co-insurance clause, the insurance payout will be significantly less than what is required to rebuild or repair the damaged property, leaving the owner with significant out of pocket costs.
How does the co-insurance clause work?
The co-insurance clause is a common provision found in many property insurance policies. Essentially, it requires the policyholder to insure their property for a certain percentage of its total value, typically 80% or 85%. If the policyholder fails to meet this requirement, they may be considered a co-insurer and would be responsible for a portion of the loss in the event of a claim.
For high value assets like commercial property, the co-insurance clause can make a vast difference to the ability of the property owner to meet reinstatement costs as they will be forced to cover the shortfall between their claim payout and the actual repair or rebuild costs.
The insurer will use the following formula under the co-insurance clause to reduce the amount it will pay for a loss.
The co-insurance clause in action
The operation of the co-insurance clause is demonstrated in the following claim example of a commercial property that suffered severe flood damage.
| Insured Value of the property: $1,200,000 |
| Current Value of the property: $2,200,000 |
| Co-insurance Provision applied by insurer: 80% |
| Loss Amount: $1,200,000 |
| Claim Payment: $818,181 |
The amount of underinsurance is then calculated by subtracting the claim payment ($818,181) from the loss amount ($1,200,000) and in this example the property owner was forced to cover a shortfall of $381,819 to rebuild their asset.
The importance of a professional insurance valuation
To avoid liability for shortfalls in your insured values, business owners can stay abreast of rising values by regularly reviewing their insurance cover.
Undertaking a professional insurance valuation for commercial property assets will help ensure that insured values remain accurate in order to avoid underinsurance. We recommend that reviews are undertaken on an annual basis, particularly during inflationary economic periods.
The value of professional advice in avoiding underinsurance
Involving an insurance broker who understands your industry sector and the risks that are particular to your business will help you ensure you have the cover you need. We're here to help. Connect with one of our experts who can help you organise a professional insurance valuation and address underinsurance today.
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