Understanding Insurance to Value and Coinsurance
by Tom Franzen, CIC, ARM, ARM-P
In our previous article, we talked about coinsurance, which is found in almost all commercial property policies. Before that, we discussed insurance to value, which became more important during COVID due to rising building material and labor costs. If we’re not careful, we could end up sharing the cost of a loss as a coinsurer—not a good thing! So, how do we avoid this?
Here are three ways to handle coinsurance:
Inflation Guard Endorsement: This option increases your coverage by a percentage, typically 2-3% per quarter, to keep up with inflation. Many insurers, including Sentry, offer different percentage and time options. While this helps, it doesn’t eliminate coinsurance entirely.
Agreed Amount Endorsement: With this option, you and your insurer agree on the value of your property annually using a “Statement of Values” form. This endorsement suspends coinsurance for that policy period, meaning you won’t be affected by coinsurance in the event of a loss, as long as your values are accurate.
Reporting Form Option: This applies to things like business property, inventory, and work in process, but not building coverage. You report the value of your property on a monthly or quarterly basis, paying only for the coverage you need. However, reports must be timely and accurate. If no one on your team can handle the reporting, this may not be the best choice.
By working with your agent or broker to choose the right option, you can avoid costly surprises related to coinsurance in the event of a property loss.
Next, we’ll shift to another topic—one of my favorite exposures. Stay tuned!
If you have any questions, contact Tom at Tom.F.Franzen@gmail.com.
Tom Franzen is the retained Insurance/Risk Management Consultant for FEMA Services, Inc. With 45 years in the insurance industry, Franzen has experience on both the company and agency sides of the business.