We are constantly bombarded by ads telling us that more is better. So, when you are shopping for insurance why would you want to get 80% when you can have 100%? Well, here is an instance where less might be more.
Many Property policies have a coinsurance clause. The coinsurance is indicated in percentages – usually 80%, 90% or 100%. You might logically assume that this refers to the percent of the limit of insurance you would receive in the event of a loss. So you of course want to have 100% available. However, this couldn’t be further from the truth.
Coinsurance refers to the amount of coverage you select in relationship to the actual value of your property. In other words, if the total value of everything in your salon in $100,000, and your coinsurance is 80%, the policy states you must carry at least $80,000 in coverage (100,000. X 80%). Likewise, if your coinsurance is 100%, you must carry at least $100,000.
As long as you carry the required amount of insurance, you are eligible to receive up to that amount in the event of a loss. However, if you underinsure, you will be penalized when you have a claim, even if the amount of your claim is well under the limit of insurance. The penalty is determined by how much you underinsure. In the above example, someone with a 100% coinsurance should have purchased $100,000. Maybe they felt that because they would never incur a total loss they were willing to insure for less, say $60,000. They are now underinsured by 40%. Any claim payment, even a small one, would be reduced by 40%. A $10,000 claim with a 40% penalty would result in a $6,000 payment, and the deductible would still apply! That’s quite a difference.
A danger of having a policy at 100% coinsurance is timing. During your busy season you stock more product than during slow season. However, you would probably insure for the average value. That means if your loss occurs when you have increased your stock, you may be at risk of suffering a penalty.
When you are determining the amount of property coverage you need, not only should you keep coinsurance in mind, you need to know if the policy you are purchasing is at Replacement Cost or Actual Cash Value. Many salon owners insure for the original cost of their equipment and build outs, or they depreciate the value. However, a Replacement Cost policy would expect you to carry the actual amount it would cost to replace everything brand new. Again, insuring at old or depreciated values could result in a coinsurance penalty.
While there are premium benefits to carrying higher coinsurance, the risks may outweigh them. You should always determine the amount of risk you are willing to take when selecting insurance coverages. You can certainly go with the least expensive, but in the long run you may come out behind. If there is a term or coverage you don’t understand, be sure to ask your professional agent to explain it to your satisfaction. And, as my mother used to say, don’t be penny wise and pound foolish.