Mastering Coinsurance & Avoiding Costly Penalties

Understanding the Importance of Coinsurance in Protecting Your Investment Properties

When it comes to safeguarding your investment properties, simply purchasing an insurance policy is not enough. It is crucial to grasp the key factors that can significantly impact your coverage and payouts, with coinsurance being one of them. Coinsurance is a standard provision in the property insurance industry that mandates you to insure your property to a specific percentage of its total value, typically 80%, 90%, or 100%. Failure to meet this requirement at the time of a loss can result in penalties, potentially reducing the amount you receive from a claim. The primary purpose of coinsurance is to prevent underinsuring of properties.

An Illustrative Example

Consider a scenario where you have an investment property insured for $100,000 with a $3,000 deductible. If the property experiences a $40,000 loss and you file a claim, an adjuster will assess the cost of rebuilding the property in the event of a total loss. Suppose the adjuster determines the rebuilding cost to be $250,000 and you have an 80% coinsurance clause in your policy. This means you agreed to insure the property to 80% of its true replacement cost at the time of policy inception. However, since you only have coverage for $100,000, you will face a coinsurance penalty for being underinsured by 50% in this case.

The coinsurance penalty is applied before factoring in the deductible and depreciation. In the example provided, the penalty would reduce your claim amount to $20,000, minus the $3,000 deductible, resulting in an actual payout of $17,000 for a $40,000 loss.

Avoiding Coinsurance Pitfalls

To prevent coinsurance penalties during a loss, insurance carriers may inflate the Insurance to Value (ITV) of your property to ensure adequate coverage. While this may protect you from penalties, it can lead to higher premiums for coverage levels you may not necessarily need. At National Real Estate Insurance Group (NREIG), we take a different approach by working closely with investors to determine fair property valuations per square foot, offering Actual Cash Value (ACV) and Replacement Cost (RC) coverage options without coinsurance starting at competitive rates.

Why Choose NREIG?

Opting for NREIG means opting for peace of mind. Our no-coinsurance policies are designed to shield you from unexpected penalties without overpaying for coverage. With flexible coverage options and a team of experts dedicated to simplifying the insurance process, NREIG provides support at every stage of your investment journey.

 

Originally published at ICOR.

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