Insurance: Insurance

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B. Co-Insurance. Insurance carriers require that their insureds carry adequate insurance with respect to property coverage in order to make sure that the proceeds from the policies are capable of being used for restoration and the other purposes for which they are intended. Each policy will require that the stated amount of insurance equal a percentage of the actual value of the property insured. These percentages vary from 80% to 100%. The effect of violating the co-insurance provision is a reduction in the amount of coverage provided when a claim is made. For example, in a policy with an 80% co-insurance feature, if the policy provides for $ 7,000,000 worth of insurance, there is a loss of $ 5,000,000, and the actual value of the property insured is $ 10,000,000, the amount of the claim paid will be the claim times the percentage resulting from dividing the amount of insurance into the value of the property. In this case, this would result in a 70% payment of $ 3,500,000.

Therefore, it is imperative to ascertain the co-insurance feature of an insurance policy and to point it out to the client. A policy that inadequately insures is almost as useless as no insurance at all.

One method of avoiding co-insurance is to have an agreed value endorsement. Under this endorsement the insurance company contracts to pay the amount specified in the endorsement without regard to valuation issues and methodology.

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