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Trying to save money by insuring for less? Beware of the Coinsurance Clause.

If you have $100,000 of inventory and fixtures, but you want to save a few dollars on the insurance, you may be tempted to insure, say, $25,000 of it and call it a day. The chances are slim that you would lose it all in one incident, right? My example comes from a true story, and I hope it motivates you to always “insure to value,” and review annually.

I had a client who insured his office for $25,000 of contents—property, and fixtures installed by him. Every year, I would ask him if the coverage was correct, and he would assure me that it was. One night, on a New Year’s eve, as it turned out, he had a burglary, where all of his expensive fixtures were stolen. The total loss was about $40,000. So, did he receive the full $25,000 for which he was covered? No, he did not.

The assumption with insurance is that an insured will insure to value. If you have $100,000, you insure that much, otherwise, you only get partial coverage.

As it turned out, he should have been insuring for about $75,000. He insured for one third of value, and since property coverages have a coinsurance clause, he got less. Here is how it works: you insure for one third, so at the time of loss, you only get one third of your loss, even if you have more coverage than that. In my client’s case, he received $40,000, less deductible divided by one third; about $13,166, on his $40,000 loss.

The moral is to insure to value. And don’t depend on your insurance agent to read your mind. You must inform your agent of any changes to operations, management, inventory, fixtures or anticipated receipts and payroll. Do it when you have the changes, so you won’t forget………better yet, do it before it happens so your agent can anticipate any possible repercussions.

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