Coinsurance and Valuation – Part 1
The building is currently insured for replacement cost. The insurer did a new valuation and said the policy limit is 70% of the RC value, which would result in a coinsurance penalty for a partial loss. Is the insured who probably won’t rebuild with a total loss better off, if the company will allow it, remaining at RC with a coinsurance penalty or going to ACV because a partial loss would still be replacement less the coinsurance penalty?
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The building is currently insured for replacement cost. The insurer did a new valuation and said the policy limit is 70% of the RC value, which would result in a coinsurance penalty for a partial loss. Is the insured who probably won’t rebuild with a total loss better off, if the company will allow it, remaining at RC with a coinsurance penalty or going to ACV because a partial loss would still be replacement less the coinsurance penalty? Question 1“The building is currently insured for replacement cost. The insurer did a new valuation and said the policy limit is 70% of the RC value, which would give a coinsurance penalty. The insured is not sure if he would rebuild in a total loss situation anyway, so he wants to change to ACV. Is the insured better off, if the company will allow it, remaining at RC with a coinsurance penalty or going to ACV because a partial loss would still be replacement less the coinsurance penalty?” Response 1A coinsurance penalty is only an issue in the event of a partial loss, so that’s the least of the insured’s worries. There are a number of issues that the insured must consider in selecting a valuation basis and limit. In addition, if the insured selects anything other than 100% insurance-to-value on a replacement cost basis, be SURE to document this and have the insured sign off on it. Here are some comments from the VU faculty: Response 2If the insured did not rebuild, he would receive ACV even when RC is provided. You might consider another valuation method such as functional replacement cost or market value. Response 3Based solely on these limited comments, the insured could insure it at ACV after getting a fair market value appraisal showing the actual cash value or fair market value of the property—less the value of the land—plus the cost of anticipated demolition. Response 4Sounds like you’re playing with fire. Put your calculations in writing and get the insured to sign off on his/her understanding. Response 5The insured always has the option of having the loss adjusted on an ACV basis anyway, but that still doesn’t remove the possibility of a coinsurance penalty. It’s very hard to know in advance which would be more favorable to the insured since the ACV of the damaged property requires some expertise not deployed ahead of time. Response 6The CP form with coinsurance still allows the insured to request an ACV settlement. If the company will allow it to remain at RC with limits below 80% of the RC value and a loss occurs, the insured can request a valuation of the loss on an ACV basis. If that amount is greater than the RC, the insured can collect the ACV. Also, if the carrier agrees to an ACV calculation, coinsurance should then apply to the ACV of the property and not the RC. Response 7You can do the math. These are example figures (without deductibles). The ACV will be the difficult number to arrive at. Building worth $100,000 Replacement Cost @ 80% coinsurance but written at $70,000. Loss is $50,000 at replacement cost. Amount paid = $70,000/$80,000 X $50,000 = $43,750. If at ACV. Assume Building at ACV is worth $70,000. Policy written at $70,000 @ 80% coinsurance. Loss of $50,000 at RC is now a loss at ACV and is $35,000. Policy pays 70,000/70000 X 35,000 = $35,000. Response 8It depends on the values involved. Use the following examples: Example A: Take the 80% rate on RCV. If the insurer attempts to impose a coinsurance penalty, the insured still has the option of saying no thank you, I want ACV. In this case, they are meeting the coinsurance clause, so no penalty. In addition they are not paying for limits they will not be able to collect. Example B: Drop to $600,000 at 80% co on an ACV basis. The difference here is the insured would not be paying the extra premium for the $100K they could not have collected on an RCV basis with a coinsurance penalty. Example C: You really need to accurately know both the RCV and ACV to make a decision. Response 9Obtain a professional appraisal on both bases before recommending this step. Response 10The insured would probably want to repair a partial loss. As an example, a windstorm damages the roof and the cost of repair is $10,000, but the ACV of the damaged property is only $5,000. The insured will not be happy. So I advise against ACV. If the insured insists on ACV, get a written and signed statement from the insured. I doubt the insurance company will go along with less than compliance with the coinsurance requirement. Part of the reason for coinsurance is to preserve the rating structure. How expensive is it to get him to 80%? If the insured is not willing to do that, you may not have a client you want to do business with. Clients sometimes argue that they did not understand when faced with a large uninsured loss. They sometimes sue the insurance agent. |
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