You can either have agreed value or coinsurance clause on your commercial property insurance policy.
You want agreed value all day long.
Having agreed value should mean that your insurer will simply pay you the amount of any building/contents property loss without much fuss.
Agreed value is a clean and clear arrangement whereby your property insurer agrees with you up front as to the value of your property and that the insurer will simply pay future covered losses accordingly.
The trouble is, most property policies have a coinsurance clause. I call them coinsurance penalties because they create room for your insurer to argue the proper value and force you to eat a significant portion of your loss.
Before we go any further, your insurance agent/broker may tell you, “coinsurance is simply a means of making sure the property is insured to value, so it’s a good thing actually!!!!”
If they do, ask them what happens if your insurer claims your property is not insured to value at the time of loss.
Better yet, ask around for business owners who have had a large property loss and had coinsurance clauses. I bet they would sharply disagree that coinsurance is a “good” thing.
What I’m getting at is this: If you buy the line that you don’t need to be concerned about possible penalties at the time of loss, you can bet you’re going to get penalized at the time of loss.
Here’s how it works:
You insure your business property with XYZ Insurance for $5,000,000 and they issue you a commercial property policy with 90% coinsurance.
This percentage simply means XYZ requires that you insure your property to at least 90% of it’s replacement cost (actual cost to completely rebuild) value or you face a penalty on their payment for any loss.
Imagine your property suffers fire damage in the amount of $2,750,000, and XYZ agrees the damage is covered by the policy.
Now, instead of simply paying $2,750,000 to cover the cost of restoration/rebuilding, XYZ claims your property was underinsured at the time of loss.
XYZ says the replacement cost value of your damaged property was actually $7,000,000. Hence, you underinsured your property by $2,000,000.
Then, XYZ does their math and you receive a claim payment of $2,172,500 for a $2,750,000 loss. If you would rather not eat $600,000 of such a loss, you do NOT want coinsurance on your policy.
You also want to be sure your property loss deductible is written in such a way to be certain the deductible comes from the loss rather than the claim payment.
You’re already eating $600,000 of a large loss, so you definitely want your deductible to be taken care of in the amount of loss you are paying out of pocket rather than deducted from your already reduced claim payment.
It may only be an extra $1,000, but it might be more and you’re already losing a fortune in coinsurance penalties.
Coinsurance actually began as a means of insurers protecting themselves against fraud, and that is a good thing.
Imagine a farmer has ten identical barns, and insures only one. A fire later burns down one of his barns.
The farmer files a claim, and the insurance adjuster shows up.
The insurer only knew about one of the ten barns, and then finds out there are actually ten barns instead of one. Now they have to determine which barn was insured.
Which barn do you think the farmer is most likely to claim he insured? (Insert obvious answer here).
The insurer was actually covering ten barns for the price of one barn. Hence, coinsurance penalties were born.
Sadly, the dishonest among us have created much headache for the honest yet again.
What was designed to be reasonable protection for insurance companies against fraudulent claims is now being used as a means of not paying what is fair and right.
There are a number of other nuances in commerical property insurance that can either save you a fortune or cost you a fortune depending upon how they are arranged at the time you bind insurance, and how any future losses occur.
Ask your insurer for agreed value. Don’t wait till renewal. If you pay at least $100,000 for your total insurance package and your insurer refuses to provide your property coverage on an agreed value basis, please reach out to me and I will be glad to help you.
FYI: In case you missed it on the website, I do NOT sell or benefit from the sale of any insurance, I am NOT an insurance agent or broker of any kind, and my offer to help you is not an attempt to steal business from your current agent/broker because I am not an agent or broker.
Having said that, getting agreed value may or may not require you to move your business by agent/broker of record letter and/or switching insurers.
Still, I think it’s clear you would rather have a claim like the one above completely covered even if it meant moving your business, yes?
To Your Success,