Understanding Insurance to Value and Coinsurance
by Tom Franzen
In my last article, I promised to delve into 鈥渋nsurance to value鈥 and 鈥渃oinsurance,鈥 and discuss options to work within the 鈥渃oinsurance鈥 requirements.
When insuring your commercial property, consider your buildings and personal property through two avenues: 鈥渁ctual cash value鈥 and 鈥渞eplacement cost,鈥 not 鈥渕arket value.鈥 Market value, the cost to purchase the property, doesn鈥檛 correlate with insurance values, which are based on 鈥渓ocation, location, location.鈥
Actual cash value (ACV) is defined as replacement cost less depreciation for age. Few properties are insured on an ACV basis because when your building is destroyed or damaged, you want things replaced new for old, without depreciation.
Replacement cost coverage is the cost to replace with like kind and quality at the time of the loss.
As material and labor costs rise, replacement costs increase, necessitating higher insurance levels to meet policy provisions like coinsurance. We鈥檒l explore coinsurance further in the next article.
It鈥檚 rare to lose an entire building or all business personal property. So, why can鈥檛 we just buy enough coverage for probable losses? For example, if we have a $1,000,000 building at replacement cost, a likely loss might be $200,000. Why not just buy $200,000 of insurance coverage? It doesn鈥檛 work that way.
Insurance policies require full replacement cost coverage, 100%, or allow lowering coinsurance to 80-90% of the full replacement cost, making us co-insurers.
The principle behind this is that many people paying premiums cover the losses of a few. This has always been a fundamental insurance principle.
When your agent or broker discusses insurance to value and coinsurance, pay attention. If they don鈥檛 mention these terms, ask why and consider finding a different insurance representative.
If you have any questions, contact Tom at Tom.F.Franzen@gmail.com.
Tom Franzen is the retained Insurance/Risk Management Consultant for FEMA Services, Inc. With 45 years in the insurance industry, Franzen has experience on both the company and agency sides of the business.