Don’t Gamble by Underinsuring Your Business Properties

This may not be on your radar, but underinsuring your property could result in serious problems for your business.

Insurance companies base premiums on an amount of insurance that is 80% to 100% of your property’s total value. This is referred to as “insurance to value,” and insurance underwriters are concerned that you may be underrating the value of your property to keep premiums low or are unaware that property improvements and the state of the real estate market have increased the value of your building. In these instances you may be underinsured.

Some people gamble they won’t suffer a large loss. Because most losses are partial, you would normally recover in full on most of your losses. However, if insurers set your rates assuming they are based on insurance to value, they might not collect sufficient premiums. So in the event of a large or total loss, you won’t have been adequately insured.

The “coinsurance condition” addresses this issue. You must agree to carry insurance at least equal to a specified percentage of your covered property’s value. The coinsurance percentage normally used is 80%, although percentages of 90% and 100% are sometimes available for a reduced premium.

The coinsurance condition penalizes you if you do not insure to at least an agreed-upon percentage of value. If you have a loss and are underinsured, insurers reduce payment on your losses based on the actual building’s insurance to value.

Don’t gamble. Discuss your current insurance to value with your insurance professional.