• Skip to main content
  • Skip to secondary menu
  • Skip to primary sidebar
  • Skip to footer
  • Sign Up
  • Contact Us
  • Advertise With Us
    • Monthly Banner Ad
    • Sponsor An Email
    • Post A Job
    • Product Launch

Agency Checklists

Massachusetts-inspired Insurance News & More

  • JOBS
  • Checklists
    • Starting Your Own Massachusetts Insurance Agency
    • Purchasing An Insurance Agency in Massachusetts
    • Why, When, & How: Times When A Massachusetts Insurance Agent Should Use A Business Broker
    • Deciding Whether or Not to Outsource Your Customer Service?
    • Employment Contracts & The Non-Compete Clause In Massachusetts
    • Hiring An Insurance Producer In Massachusetts
    • Insurance Agent to Agency Loans In Massachusetts
    • Moving Your Massachusetts Insurance Agency
    • How Premium Financing Can Work For Your Massachusetts Insurance Agency
    • Remuneration Audit Checklist
    • Selling Your Massachusetts Insurance Agency
    • Applying For An Agency Loan
    • When The Auditor Calls
  • Data
  • Events
  • InsurShop
    • Insurance Quiz Time
    • Insurance Books
      • Innovation Titles
      • Improvement
      • Leadership
      • Licensing
      • Marketing
      • Sales
    • Insurance Films
    • Insurance Glossary
  • Partner News
You are here: Home / Insurance Insights | Massachusetts / InsurOp-Eds / InsurOp-Ed: How to Explain Coinsurance to Clients

InsurOp-Ed: How to Explain Coinsurance to Clients

July 9, 2019 by Bill Wilson

Agency Checklists, MA Insurance News, Mass. Insurance News


Although most commercial property policies provide examples of how coinsurance works (e.g., check out the Additional Conditions – Coinsurance in the ISO CP 00 10 – Building and Personal Property Coverage Form), why policies have such a clause is a mystery to most insureds…and many agents. So, let’s look at the purpose behind coinsurance…

According to research done by the late John Eubank, CPCU, ARM, the coinsurance condition was introduced as a ‘standard’ clause by the Louisville Board of Fire Underwriters in 1885 for pork and tobacco risks and was expanded to other property in 1890. However, individual insurer use of this condition dates back to at least 1877 (Continental Insurance Company), if not earlier.

Coinsurance is a contractual requirement that the insured carry agreed upon insurance-to-value, as specified by a percentage (usually 80%, 90% or 100%) entry on the Declarations page. If, at the time of loss, the limit of insurance is less than the value of the property times the coinsurance percentage, the insured will become a “co-insurer,” along with the insurance company, when a loss occurs.

The purpose of coinsurance is not to punish an insured for carrying inadequate insurance-to-value, but rather to provide a financial incentive that: (1) encourages them to carry adequate limits in the event of major losses, and (2) rewards them (in many instances) with a significant premium reduction for doing so.

Why do insureds need an incentive to carry limits of insurance approaching the value of their property? Simple…because, in the aggregate, most losses are partial and don’t result in a total, or even substantial, loss. Without a financial incentive, insureds who are not risk aversive might be inclined to purchase relatively small limits of insurance. Since that inclination depends, in part, on the structure and occupancy of the building, the amount of the incentive is largely determined by those factors.

To illustrate, according to one estimate, less than 2% of fire losses are total, and 86% of fire losses result in damages of 20% or less of the building value. That is, if a building is worth $500,000 and a fire occurs (which isn’t that likely to begin with), there is an 86% chance that the damage will be $100,000 or less. So, if the insured is a risk taker, why not insure the building for $100,000 or less? Of course, the statistics above are just for the peril of fire…if you add windstorm and other potentially catastrophic perils, the numbers may change.

These numbers are averages. Statistically, a reinforced concrete office building is MUCH less likely to experience a major loss than a wood frame woodworking shop. So, the owner of the office building could be less inclined to carry full insurance to value because the probability of a serious loss is virtually nil. On the other hand, the owner of the woodworking shop is much more likely to insure to value because it is easy to visualize a major loss occurring.

Coinsurance provides an incentive for adequate insurance-to-value by providing a rate credit for carrying relatively high limits to value…the credit is much larger for the fire-resistive office building because the owner needs a larger incentive and the rate credit reflects the lower probability of loss. For example, look at the calculations below:

Building Const. Value Gross
Rate
80%
Rate
Gross
Prem.
80%
Prem.
Offices Fire Res. $500,000 0.64 0.18 $3,000 $900
Woodworker Wood $500,000 3.74 3.37 $18,700 $16,850

The gross rates and premiums are the rates and premiums that would be charged if coverage was written without a coinsurance requirement. The 80% rates and premiums are those that apply when the insured contractually agrees to carry a limit of at least 80% of the value of the property at the time of loss. Note that the woodworker gets only a 10% credit from the gross (no coinsurance) premium, while the office building gets a 70% credit.

What if the owner of the fire-resistive building heard that there was only a 14% chance that a fire loss would cause damages in excess of 20% of the value of the building…wouldn’t he/she only buy $20,000 of insurance? No, because he/she couldn’t pass up the bargain, as shown below (and we all know that most insurers wouldn’t let him anyway :-):

Office Building
Policy Limit
Gross
Rate
80%
Rate
100%
Rate
Premium
$100,000 0.60 $600
$400,000 0.18 $720
$500,000 0.15 $750

As you can see, if the insured elected to buy only $20,000 coverage rather than $80,000, he/she would experience a premium reduction of less than 17% while reducing the coverage amount by 75%. Conversely, for 25% in additional premium, the insured can increase his/her coverage by 300%!

Thus, coinsurance provides an incentive to purchase higher insurance to value than some (perhaps many) insureds would be inclined to do otherwise. In doing so, insureds can save significant amounts and they have the assurance that, in the unlikely event that they do have a major loss, they’re covered…IF they insured to value in accordance with the coinsurance provision.

More about Bill Wilson…

Agency Checklists, MA Insurance News, Mass. Insurance News, Bill Wilson, Insurance CommentaryWilliam C. Wilson, Jr., CPCU, ARM, AIM, AAM is the founder of InsuranceCommentary.com. He retired from the Independent Insurance Agents & Brokers of America in December 2016 where he served as Assoc. VP of Education and Research. The founder of the Big “I” Virtual University, he served as its director for over 17 years.

In addition to his role at the Big “I”, he also is the former Director of Education & Technical Affairs for the Insurers of Tennessee. He also was employed by Insurance Services Office, Inc.  A graduate of the Illinois Institute of Technology, Mr. Wilson obtained a B.S. degree in Fire Protection & Safety Engineering.

Copyright 2016-2019 by InsuranceCommentary.com. Reprinted with permission.

 

Print Friendly, PDF & Email

Filed Under: InsurOp-Eds Tagged With: Agency Checklists, insurance agents massachusetts, insurance coverage, InsurOp-Ed

Primary Sidebar

See Who’s Hiring On the AC Job Board

Sponsored Checklist

When Why & How To Use A Business Broker in Massachusetts

Sponsored

Career News

Acrisure Names Matthew Marolda as Chief Innovation Officer

Renaissance Alliance's Michael Cormier

Michael Cormier Named Chief Revenue Officer

Merchants Insurance Robert Zak

Robert M. Zak Appointed Board Chair of Merchants Insurance Group

Plymouth Rock Strengthens Marketing Team with Two New Appointments

Risman Insurance Agencies Hires Monica Adwani As Director of Marketing & Sales

Risman Insurance Agencies Hires Monica Adwani As Director of Marketing & Sales

Latest Agency Sales

Massachusetts insurance agency Partners Insurance Group

Partners Insurance Group Purchases The Interstate Insurance & Finance Company

Boston-based Risk Strategies

Risk Strategies Acquires Specialty Insurance Solutions

AssuredPartners Northeast acquires The Glynn Agency

AssuredPartners Acquires The Joseph A. Glynn Insurance Agency

Compass Planners Joins Forces With The Hilb Group

Compass Planners Joins Forces With The Hilb Group

More Agency Sales

Comments & Updates

  • Khalid on February Mass. Home Sales Hit 17-Year High
  • Robert on Marie Rose of Kaplansky Insurance Earns CPIA Designation
  • Michael Powers on Tips to Help Insureds Avoid Auto Repair Shop Fraud
  • Jim Steere on Tips to Help Insureds Avoid Auto Repair Shop Fraud
  • Tony Lucacio on Associate General Counsel For Goosehead Insurance Terminated After Participating In January 6th Events In Washington, D.C.

AC In Your Inbox

Massachusetts Law Updates

Mass. Court Bars Suit Seeking Plymouth Rock To Pay Title, Registration, And Inspection Fees On Total Losses

A class action complaint against Plymouth Rock sought a ruling on regulatory costs for first-party total loss claims.

Mass. Appeals Court Reverses $4 Million Defense Verdict Over Judge Advising Jury About Insurance

Massachusetts, as opposed to many states, allows insurance companies to pursue subrogation in the name of the insured rather than in the name of the insurance company. This case is one such example.

Tips to Help Insureds Avoid Auto Repair Shop Fraud: Part 2

Beware of written waivers!

How many automobile insureds receive renewal questionnaires that they do not return to their insurers? Quite a few, since many of the questionnaires, stated something to the effect that “if there are no changes to the information on the questionnaire, the insured does not have to return it.”

Failure To Return Auto-Renewal Questionnaire Results In Coverage Denial In Lamborghini Collision Lawsuit Due To Insurer’s “Snowbird Clause”

A First Circuit Court of Appeals found that the failure to return a renewal questionnaire with updated information resulted in two Massachusetts insureds losing their optional collision and liability coverage and umbrella coverage in a Naples, Florida collision involving their Toyota Highlander and a $100,000 Lamborghini.

More Mass. Law Updates

CAR News

MA Gas Prices: Another Week Another Increase At The Pump

1st Update 2021: The MA Private Passenger Auto Insurance Marketplace

1st Update 2021: The Commonwealth’s Commercial Auto Insurance Marketplace

Tips to Help Insureds Avoid Auto Repair Shop Fraud

View More CAR News

DOI News

Division Expects Mass. Auto Carriers To Submit New Rates By June 30

Massachusetts Insurance Commissioner Leads Insurance Standard-Setting

Mass AGO Continues Push For Auto Insurance Premium Reductions

DOI To Hold Hearing On CAR Proposed Performance Standards

View More DOI News

Insurance Fraud

Auto Body Shop Owner Sentenced For Tax Fraud

Acton Agent Sentence To 8.5 Years For Stealing $3.8 Million From Clients

Peabody Contractor Indicted For Insurance Fraud And Payroll Tax Evasion On $2.5 Million Of Under-The-Table Wages

Massachusetts Shares in $39.5 Million Multistate Settlement Agreement Over Insurance Company Data Breach

More Insurance Fraud News

Footer

Agency Checklists

About us
Contact us

14 Summer Street
Suite 102
Malden, MA 02148
617-598-3800
info@agencychecklists.com

Advertise on Agency Checklists

We offer a variety of ways to get help promote your company or product.

Announcements
Email Sponsorships
Partnerships
Custom Collaborations

*Affiliate Disclosure

Please note that any of Agency Checklists’ articles might contain one or more affiliate links. This means that any subsequent purchase resulting from these links may result in a commission for us, but at no additional cost to you. For example, as an Amazon Associate, Agency Checklists earns a commission from all qualifying purchases. By working with affiliates we can continue to keep Agency Checklists subscription free. Thank you for your support.

SEARCH OUR SITE

Explore Our Archives

Copyright © 2021 · Agency Checklists · All rights reserved.