Mastering Coinsurance & Avoiding Costly Penalties

Adequately protecting your investment properties requires more than just purchasing an insurance policy; it involves understanding the key factors, like coinsurance, that can severely impact your coverage and payouts.

Coinsurance is an industry-wide property provision that requires you to insure your property to a certain percentage of its total value, typically 80%, 90%, or 100%. If you do not meet this requirement at the time of loss, you could face penalties, which means you might not receive the full amount you expect from a claim.

Coinsurance is intended to prevent the under-insuring of properties.
For Example... Let’s say you have an investment property insured for $100,000 with a $3,000 deductible. The property experiences a $40,000 loss, so you file a claim with your insurance carrier. Any time you file a claim, an adjuster will visit the property, and part of their responsibility is to determine how much it would cost to rebuild the property if it had been a total loss.

For this example, we’ll say the adjuster determines that the cost to rebuild is $250,000. After referring to the declarations page of your policy, the adjuster sees you have an 80% coinsurance clause, meaning when you entered into this policy agreement with the carrier, you agreed the property would be insured to 80% of the true replacement cost. Had you been carrying $200,000 or more of building coverage (80% of $250,000), you would have met your coinsurance clause. However, as you are only insured to $100,000, you will be assessed a coinsurance penalty based on the percentage you are under-insured (in this scenario, 50%).

This penalty is incurred prior to figuring in the deductible and depreciation. So, in this scenario, the coinsurance penalty would reduce your claim amount to $20,000 minus your $3,000 deductible. So, your insurance carrier would pay out no more than $17,000 for your $40,000 loss.

Avoiding Coinsurance Pitfalls
If you’ve ever read through your declarations page and wondered why you are insuring your 1,000-square-foot home for $200,000, the answer typically lies within the coinsurance clause.

In an attempt to avoid coinsurance penalties in the event of a loss, many insurance carriers will inflate the Insurance to Value (ITV) of your property. They often do so to prevent situations in which clients, already dealing with the stress of a loss, aren’t further burdened by penalties for under-insurance. The unfortunate reality is that this can lead to you paying higher premiums for coverage levels you may never need to claim.

At National Real Estate Insurance Group, we take a different approach. We work closely with each investor to determine a fair valuation per square foot for the property, ensuring coverage needs are met without unnecessary costs. We offer Actual Cash Value (ACV) coverage with no coinsurance starting at $75 per square foot. If you’re looking for more comprehensive coverage, our Replacement Cost (RC) option begins at $120 per square foot, also without coinsurance.

Why Choose NREIG?
Choosing NREIG means peace of mind. Our no-coinsurance policies are designed to protect you from unexpected penalties without overpaying for coverage. With flexible coverage options and a team of experts dedicated to helping you navigate the complexities of insurance, NREIG supports you in every step of your investment journey. Learn more at NREIG.com/icor24.

By Jules Sneddon, Insurance Expert,  Jules@nreig.com  nreig.com