What is a Co-Insurance Penalty?

[Adam Schwery]

Co-Insurance is a property insurance provision that requires you to insure your property at or above a percentage of the property’s rebuild value or face a penalty in the form of a reduction on a claim payment. Some buildings are more expensive to rebuild than their market value. Maybe you are not concerned about having enough funds to rebuild your property in the event of a total loss, but you do want to get back your original investment. What do you do?

Often an insurance company will say that you need to insure a building at a certain percentage of the rebuild value of the building, in order to have Replacement Cost coverage. The other option, companies can offer is Co-Insurance. Ok, so let’s break down an example.

You purchase a building for $800,000 and the rebuild value is $1 million. You get quotes back and feel that $800,000 is plenty of coverage. The policy you purchase has co-insurance of 80%. A few years go by and you have a fire claim that damages a portion of the building. Your policy has $800,000 of coverage and the building now has a rebuild value of $1.1 Million. You may be assessed a co-insurance penalty. Co-insurance means that you must always insure the building up to 80% of the rebuild value. In this situation of a fire claim, the insurance company will not pay you 100% replacement cost coverage, because you did not meet the 80% co-insurance requirement. The check would have a co-insurance penalty assessed of about 7%.

In more extreme examples, you may not know the insurance companies rebuild value of your building. Let’s say you got a great deal on a brick 6-unit low rise apartment for $400,000 and you got an insurance policy for that amount of coverage. If you don’t know the co-insurance requirement, you could face a stiff penalty at the time of a claim. Let’s say the rebuild value is close to $600,000, you insured the building for 67% of the rebuild value and would face a 13% reduction on the claims check. It can be frustrating to say the least, because you already have a deductible to pay.

Another common co-insurance limit is 90%. It is important to know if you have co-insurance on your policy and how your coverage amount compares to the rebuild value of the building.