Co-Insurance Can Be a Disaster For You!

Just having a building "insured" is NOT enough. I know what you're thinking - what? Yes, you have it insured. You paid your premiums. You see it listed on your declaration pages. You send a copy of the policy to your bank as proof it is insured. Everyone happy, you're good to go, right? Well, maybe not. Seriously, maybe NOT!  You need to have that building insured PROPERLY. What does that mean? It means that you have to insure that building to the proper value to avoid becoming a Co-Insured and suffering a Co-Insurance Penalty. Easy enough, right? 

No it's not. It's not easy enough, if it was easy then 90% of the people I consult with on property insurance would have heard of and understand the concept of Co-Insurance. But they don't. Maybe it's because of that 90% - half of their agents never take the time to explain the clause to them and the other half of the agents I'm pretty sure don't know how to explain Co-Insurance themselves.

The barn fire pictured to the right occurred at Prairie Oaks Farm in McHenry, Illinois. The barn has not been rebuilt yet, ground breaking for the new modern stable will be this spring. Fortunately, my client was insured PROPERLY, he satisfied the Co-Insurance requirement of the contract and is being indemnified for the total Replacement Cost of the old barn. They will build their new barn the same way as the other stable on the property - commercial fire alarms, surveillance cameras and heat detectors. Thankfully, no horses were lost in this fire, and no horses will be lost in their new stables either because of the added safety measures they consider and install in their stables. 

You never know, lightning strikes a pole 40 yards away and your barn burns to the ground. This is a real, and a perfect example, of why you must not just insure your buildings, but you need to insure them properly.   

There is a Co-Insurance Clause in every equine property policy. Take a look at yours right now. It should be listed on your declarations page, where ALL the most important information is listed, and I'll bet you see 80% in there somewhere. Am I right? 80%? What does that mean? It means that you agree to insure your building(s) at a minimum limit, a limit that is equal to at least 80% of the building's value. It doesn't matter what valuation basis you have selected - Replacement Cost, Actual Cash Value, or Functional  Replacement Cost - you need to insure it to at least 80% of that value.

Right now, just keep in mind the 80%. I won't go into the different building valuation types right now. Please call me for more in-depth information on these valuation types. From here on, we are going to focus on the most common evaluation basis and that is Replacement Cost - what it would take, at the time of a loss, to replace a building of like, kind and quality in the event it was totally destroyed. 

Too many consumers today, I'd estimate about 90%, are unaware of the Co-Insurance Clause. As briefly touched on above, per your policy contract, and it is a contract, you agree with the insurance company to insure your building(s) to at least 80% of its Replacement Cost. And what your contract will say, is that "at the time of a loss" if you have not insured it to at least 80%, you will suffer a penalty, a Co-Insurance Penalty. 

Yes, if you don't insure your building(s) to the 80% mark, you will be penalized in the event of a loss. Basically, the percentage you "under" insure the building from the 80%, is the percentage amount of the co-insurance penalty. Here is an example:

Your stable has a Total Replacement Cost of $500,000.

According to your policy contract, You MUST insure it to at least 80% of its Replacement Cost, which is $400,000 ($500,000 x .80 = $400,000).

You have the stable insured for $325,000.

A tornado rips through your area, peels the metal roof off your barn. It will take $150,000 to replace the roof. In this scenario, do you know how much you will receive from your insurance company?

How about $121,875?  No. You will not get the total replacement cost of the loss because you did NOT insure that building to 80% of its Replacement Cost as you AGREED to do in the policy contract. You only get 81.25% of that loss, you were UNDER-INSURED by 18.75%, thus, you become a "Co-Insurer" to the loss for that 18.75%. Here's how:

You had $325,000 of insurance on the building.

You should have had $400,000 according to your policy contract - you agreed to insure it to at least 80% of its value. Remember? 

So, you divide the amount you had the building insured for by the amount you SHOULD have had the building insured for and you come up with a percentage. 

$325,000/$400,000 = .8125 or 81.25%

New roof cost is $150,000 x .8125 = $121,875 is your recovery from insurance.

That 81.25% is the percentage you will recover on your loss for being under-insured on that building. You were 18.75% under the 80% mark, so, you eat 18.75% of the loss! (100.00 - 81.25 = 18.75%)

This Co-Insurance Clause is in every equine property policy I have ever seen.  I think now you can see how co-insurance can be a disaster for you if you are not insured PROPERLY. On this example above, if it happened to you, you would end up paying out of your pocket  $28,125 ($150,000 - $$121,875 = $28,125)

Yeah, OUCH! And what makes it so much worse is that you won't find this out until AFTER the loss. If you don't like insurance companies now, you surely will not like them after this happens to you. 

Please don't get caught up in a Co-Insurance Penalty situation, it can be avoided. THIS is exactly why we do Valuations on all the structures for our clients. I am not going to be the agent trying to explain co-insurance to my client AFTER a loss. You need to know about co-insurance from the beginning. That is how you avoid unpleasant surprises like above. 

Call me, I'll make sure you don't get a caught up in a Co-Insurance Penalty! Thank you.