Property Values vs. Insurance Policy Values

This past week I was with a client who was frustrated by the value an insurance company had mandated on his property for insurance purposes.  This particular insurance carrier calculated a number in excess of the market or resale value of the property.  His comment was, “I’ll gladly sell them the property for that value”.     

With the real estate market soft in most parts of the country, it is not surprising that policy holders may be frustrated as my client was, or at a minimum confused by the appropriate limit of insurance to have on their building or home.

Most property policies have a coinsurance provision(typically 70%, 80% or 90%) which keeps you from insuring a property for just any value without suffering a penalty.  At the time of a partial loss, the insurance carrier will identify the coinsurance provision and make a calculation based on the provision percentage.  If you haven’t insured the property “adequately” as defined by the insurance carrier a substantial penalty could be assessed to the claim. 

For example:  Let’s say a property is insured for $500,000 and there is an 80% coinsurance provision on the policy.  After a partial fire loss $300,000 the claims adjuster determines that the replacement cost value on the building should have been $1,000,000.  The insurance carrier would value the loss settlement at $187,500 less the policy deductible.  A $112,500 “penalty” would be not be well received by the policyholder.

The simple calculation is:  DID/SHOULD * Loss = Claim Settlement

In other words, the adjuster will determine what you DID insurance the property for ($500,000 in our example) divided by what you SHOULD have insured it for ($1,000,000 x .80=$800,000).  That factor multiplied by the loss amount is the penalty.

At Texas Associates we are not property valuation experts, but we do understand how property insurance policies work.  As a Trusted Advisor to thousands of property owners, we work every day to help our clients understand the products they are purchasing and ways to protect their assets.  There are a number of solutions to the problem outlined above,.  Call your Trusted Advisor or our office if you want to make sure you aren’t the victim of a coinsurance penalty.

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