Parks Chastain did a nice job in describing coinsurance penalties in his January 6, 2010, blog entry. This post is entitled "The Co-Insurance Penalty - Or Insufficient Insurance To Value - And Its Impact On An Insured." This appears in the Tennessee Insurance Litigation Blog. Mr. Chastain correctly describes the "insurance to value" concept and the coinsurance penalty calculation, which is imposed upon an insured in the event property is undervalued for insurance purposes.
I would like to to take this a step further by stating that coinsurance penalties, wherever they appear in commercial property, builders risk or other inland marine policies, should be avoided altogether. These provisions may apply to physical damage to buildings, contents and other property, as well as time element coverages such as loss of revenue.
While some policies do not have a coinsurance provision, the vast majority do. The way to accomplish removal of a coinsurance provision is to request and obtain an Agreed Value policy coverage extension or endorsement from the insurer. This is also sometimes referred to as an Agreed Amount endorsement. In either case the extension or endorsement will suspend or waive the coinsurance requirements altogether.
Insurance underwriters will not necessarily issue a coverage extension or endorsement automatically. The underwriter will often review internal or external property valuation guidelines to gain assurance that the insured amounts reflect the valuation method(s) set forth in the insurance policy. In some cases the underwriter may ask additional questions of the insured. Once satisfied the underwriter will proceed to issue the extension or endorsement. In some cases there is a modest additional charge made for the added coverage. In other cases it is issued at no additional cost.
Conclusions: Coinsurance provisions do not help insureds. On the contrary, these clauses are designed to financially punish insureds. The potential penalty can commonly be removed by following a few simple steps.
