The Hidden Cost of Underinsuring Your Business: Understanding the Co-Insurance Clause

As a business owner, ensuring your assets are fully protected is crucial to your long-term success. But what happens if you don’t insure your business to its full replacement value? This is where the co-insurance clause comes into play—a provision in many insurance policies that could leave you unexpectedly footing a significant portion of the bill after a loss.

What Is the Co-Insurance Clause?

The co-insurance clause is a stipulation in most commercial property insurance policies. It requires that the insured maintain coverage equal to a specified percentage (often 80%, 90%, or 100%) of the property’s full replacement value. If your policy doesn’t meet this threshold, you become a “co-insurer,” meaning you’ll share in the cost of any loss—even if it’s a partial one.

Here’s how it works:

• Full Replacement Value: The total cost to replace or repair your business property without accounting for depreciation.
• Co-Insurance Penalty: If you insure your property for less than the required percentage of its replacement value, the insurer reduces your payout proportionally, making you responsible for part of the claim.

The Real-Life Impact of Underinsurance

Let’s break it down with an example:

• Your building’s replacement value is $1,000,000.
• Your policy has a co-insurance requirement of 80%, meaning you must insure at least $800,000.
• However, you only insured the property for $600,000.

In the event of a loss, the insurer will apply the co-insurance formula:

(Amount of Insurance Purchased ÷ Required Insurance) x Loss = Payout

If you experience a $200,000 loss, the calculation would look like this:

• ($600,000 ÷ $800,000) x $200,000 = $150,000

You would receive $150,000 from the insurer, and you’d be responsible for the remaining $50,000, plus your deductible. This could devastate your business’s finances.

Why It’s Better to Insure to Full Replacement Value

1. Avoid Out-of-Pocket Expenses: By meeting the co-insurance requirement, you eliminate the risk of paying a percentage of the loss.
2. Protect Your Bottom Line: Unexpected costs can erode profits and disrupt operations.
3. Peace of Mind: Knowing your assets are fully insured allows you to focus on growing your business instead of worrying about financial setbacks.

How to Ensure Proper Coverage

1. Work with an Expert: Insurance professionals can help accurately determine your property’s replacement value and recommend the right level of coverage.
2. Regularly Review Policies: Property values can change over time due to inflation or upgrades. Ensure your coverage keeps pace.
3. Avoid Cutting Corners: Underinsuring to save on premiums is a short-term solution with potentially disastrous consequences.

Conclusion

While it may seem tempting to save on premiums by underinsuring your business, the penalties imposed by the co-insurance clause can cost you far more in the event of a loss. Fully insuring your property to its replacement value is the best way to safeguard your financial stability and ensure your business can recover quickly after an unexpected event.

Partnering with a knowledgeable insurance provider ensures you’ll have the right coverage and advice tailored to your unique needs. Don’t wait for a loss to reveal gaps in your policy—take action now to protect what you’ve worked so hard to build.

Jenny is a business insurance broker with Waypoint Insurance. She can be reached at 604-317-6755 or jhansen@waypoint.ca.  Please connect with me on LinkedIn at https://www.linkedin.com/in/jenny-holly-hansen-365b691b/. Please connect with Jenny at BlueSky: https://bsky.app/profile/jennyhollyhansen.bsky.social

Jenny Holly Hansen is a cohost with Chris Sturges of the Langley Impact Networking Group. You are welcome to join us on Thursday’s from 4pm to 6pm at: Sidebar Bar and Grill: 100b - 20018 83A Avenue, Langley, BC V2Y 3R4

Jenny Holly Hansen is a cohost with Chris Sturges of the WRN News - Langley Edition

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