The Perils of Coinsurance in a Commercial Insurance Policy

I have received a few very specific questionswanting to spend the additional premium.
regarding the implications of co-insurance in a Policy. ITo the astonishment of all, a neigbouring unit in their
can cite a case I was involved in some years ago.Industrial Mall had a fire over the weekend, which
Co-insurance is a nasty little bit of fine print thatapart from the smoke and fire fighting damage also
forms part of virtually every Insurance Policy, and, ifcaused the sprinklers to trigger in my Client's
not complied with, can leave you out of pocket forpremises. The majority of their equipment was
substantials sums of money.destroyed, but smoke, fire and water damage are
The Insured's operations are engineering based -Insured Perils, so not to worry...
non-destructive materials testing. In other words, aWhen it came time to settle the claim, the Insurer
customer would provide them parts or completedquite rightly applied the Co-Insurance Factor. Insured
products, and have them apply specific tests to seeValues should have been at least $990,000 ($1.1
if the product held up as it should. For example, theymillion x 90%) but instead were $280,000. And here
might repeatedly heat and cool a part to determine ifis how this ugly clause works. Divide the amount of
a coating was going to perform satisfactorily in theInsurance you did have at the time of loss by the
real world.amount you should have had. In this case, the
The equipment in the shop was very high tech,Property Values were only insured to roughly 28% of
needless to say.what they should have been.
I should also add that I inherited the file upon joiningThe total amount claimed was reduced by 72%. The
the Firm I am at. My practice was, and still is, to visituninsured portion of the loss was close to $750,000,
any Client and inspect the property and operations toborne out of pocket by the Policy Holder.
make sure the Policy is appropriate. I did so, andThey managed (one wonders how!) to stay in
noted that the limit for Property Insurance - whichbusiness, and I managed (equally surprising) to retain
includes equipment - was very low when total valuesthem as Clients to this day.
were taken into consideration. In round figures,Needless to say the Policy Limits are now carefully
Insured values should have been around $1.1 million.and regularly reviewed by all, and the principle of
What showed on the Policy was $280,000. I quickly'Insurance to Value' is carefully applied.
made written recommendations to increase theThe moral to this story? You should carefully consider
property limits to at least the 90% factor (typicalthe total values of all property, and make certain to
co-insurance requirement).Insure fully - or be exposed to the same kind of
The client adopted a wait and see approach, notpotentially disastrous loss as my Client experienced.