Coinsurance/Insurance to Value Revisited: An Essential Concept in Property Insurance

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Another way to avoid or minimize the problem of underinsurance is for the insured to purchase agreed value coverage, which is available with commercial property insurance. This coverage suspends the coinsurance clause if the insured carries the amount of insurance that the insurer and insured agree to be the property’s actual value. This amount is entered under the agreed value heading in the declarations for each category of property (building, personal property) to which the option applies. With this option elected, the insured and insurer have agreed prior to loss that the amount of insurance carried is adequate for coinsurance purposes. It is important, therefore, that an accurate insurance amount is established for this endorsement to be effective. Otherwise, there is little benefit to an agreed value endorsement.

Still another consideration is inflation guard coverage, which automatically increases the amount of insurance annually by a percentage indicated in the declarations, so that the insurance limit keeps pace with construction costs.

Insuring the building for an amount that accurately reflects or
approximates replacement value can reduce the risk of underinsurance. Agents and brokers can provide a valuable service to their clients by explaining these concepts and encouraging the purchase of appropriate amounts of insurance that will avoid an underinsurance situation and resulting penalty. Although few homeowner insurers are offering guaranteed replacement cost coverage today, most provide increased coverage (percentages may vary by company) for the dwelling over the face amount limit, which should help to reduce the risk of underinsurance.

The replacement cost estimating tool of Marshall & Swift/Boekh (MSB) is a popular option among insurance companies. The company offers a consumer version of the program used by insurers in the event the insured does not agree with the replacement value established by the insurer.

Adjusting Today author Robert J. Prahl, CPCU