Many of you are unfamiliar with co-insurance because it’s one of those things your average insurance agent won’t necessarily point out.
Probably, because they don’t realize that you are underinsured. For instance, take a look at this situation that actually occurred with one of our clients.
True Story: Owned Equipment & Co-Insurance
Company ABC rents out trailers to production companies. When they started their company, they took out a policy that covered the 2-3 trailers and a total value of around $200,000 for their owned equipment they had at the time. Sometime later, they had a situation occur and needed to submit a claim of around $150,000.
You’d think they had enough coverage, right?
Wrong! It turns out that the insured had accrued over $1,000,000 worth of equipment, and they had never updated their coverage. On top of that, they had a 90% co-insurance clause on their policy.
Co-insurance is hard to describe, but the basic idea is that it’s a clause that’s added to most property policies to make sure the insured is not underinsuring themselves.
So at the end of the day, the insurance company was only able to pay a little over $30,000 for the claim.
Why would they do that, you ask? They had $200k of coverage, and the claim was only $150k, so he should have $50k of coverage to spare! That’s where co-insurance comes in.
Get Out the Calculator
Things are about to get a little math-heavy but stick with me.
The way you calculate whether or not co-insurance will affect your business is by looking at your percentage. Most policies have a 90% co-insurance penalty, though it can fluctuate between 50% – 100%. This percentage is the amount of your total equipment value that you MUST insure to avoid any penalties
For instance, if you have $250k of rented equipment coverage at 90% co-insurance and you rent $270k, and then you have a claim for $100k, the whole claim will be paid because you have insured yourself up to 90% of the total amount. $250k is more than 90% of $270k. If you’re under the percentage, then a co-insurance penalty kicks in.
How Much Is the Co-Insurance Penalty?
Here’s how you remember the calculation: “Remember your DSL Internet!”
“DSL” stands for “Did, Should, Loss.” So you take the amount of insurance that you DID have, divide by the amount you SHOULD have, then multiply by the sum of the LOSS.
So consider my client’s claim, for instance. They DID have $200k of coverage, they SHOULD have had $900,000 (that’s 90% of the $1,000,000 of equipment they owned), and the LOSS was $150k.
So the math goes like this: $200,000 / $900,000 X $150,000 = $33,333. So even though they had enough coverage for the loss (theoretically), they were so underinsured that the insurance company penalized them by only paying for a percentage of the claim.
Call Your Insurance Agent
I know that co-insurance is a bit confusing, but if you have any questions, please call me. Owned Equipment & Co-Insurance is a very important concept that you need to fully understand and appreciate because being underinsured could be the difference between a fully covered claim and a tragic setback!