"Co-Insurance" the Fine Points of Partial Insurance

If you insure your assets for less than their full value, you won't get fully compensated for a partial loss, even if it's less than your insured value. This thread explains the thinking. May 12, 2008

Recently I asked a new insurance agent for a quote on building contents insurance for my shop. When asked how much coverage I needed, I responded by asking for two quotes: one for $50K, and one for $100K. I figured I could decide later how much I really needed. And this is the way another agent last year quoted their prices to me.

The response from the insurance agent was a mini-lecture on "co-insurance." If I understood her correctly, if I insure my contents for $50K, and I really had $100K worth of contents, and part of my stuff was destroyed ($30K), I would not receive $30K in a claim. Since I had only insured half of my value, I would only receive half of the claim, or $15K.

This just doesn't sound right to me. If I wasn't asking, or paying, for $100K of coverage, but was paying for $50K, why shouldn't I receive the $30K? I know I would not expect $100K if everything was destroyed, since I didn't pay for $100K. But why not the $30K if I was paying for $50K?

Can anyone shed some light on this? Is this something new, a new way for an insurance company to weasel out of paying legit claims, or have I just not been informed of the way the system works by my previous agents?

Forum Responses
(Business and Management Forum)
From contributor R:
If you really think about it, it makes perfect sense. In most losses, the loss is partial. If the insurance companies allowed insureds to only insure a partial value of their property, then the insurance company would have more exposure to the loss at lower premiums.

Example. If the premium is 10% of the value of the property, which is $100,000, then if you insured for the full amount, your premium would be 10,000 a year versus 5,000 if you insured the value at $50,000. Now if you had a 30,000 loss, the insurance would pay you the full $30,000 while having collected only $5,000 in premiums. Most insured figure that a total loss is unlikely and try to insure for less, in order to save on the premiums. That is unfair to the insurance company (I know - I can't believe I am saying that either). Ask which portion of your property was insured if you only partially insured your property. You are asking to be covered on any portion of the $100,000 of loss in the example above but only paid for $50,000 of coverage.

It would be as if you had a car that is worth 50,000 and insured it for 25,000. How would the insurance company distinguish what parts of the car were insured and which were not?

I also believe that most insurance co-insurance kicks in if you insured for less than 80% of value. So, if you are trying to save some money, you can get away with insuring your property to 80% of value. Before you take the above advice, ask your agent at what percentage coverage co-insurance kicks in.

From the original questioner:
Okay, now that you reminded me, she did mention something about the 80% (or possibly 90%) level. It was a 45 minute conversation, and evidently I did not remember all of the details.

Regarding your comment about the car being insured for half of its worth, and what parts were and were not covered by insurance: I thought that before the insurance company would pay out anything, I would have to prove that I did own it and it was present at the time of the loss. So, I would have to provide receipts, or digital pictures, or a list; i.e., some type of documentation. Therefore, it would be relatively clear up front what parts were covered and what parts were not covered. (In the case of a car, it is readily apparent what parts a car has. In the case of building contents, it is not so apparent. Hence, the need for an inventory, preferably kept up to date before any claims arise. The analogy was helpful, though.)

So, if I choose not to cover my 20+ year old used file cabinets, and do not want to pay for the insurance for them, then I have no right to file a claim if they were destroyed in a fire. Therefore, they would not show up on any inventory listing that I ever presented to the insurance company. However, it sounds like the claims adjuster could come out after the fire and say "Look. I found some burnt out file cabinets that were not on the inventory list. That increases the total original value of everything, and now I am going to invoke the 'co-insurance rules' and not pay out as much on this claim..." even though I was not asking for reimbursement for the old file cabinets. In essence I was "self-insuring" the file cabinets. And, if they were destroyed, I would have to replace the file cabinets (if I ever wanted to) at my own expense, not the insurance company's expense.

From contributor R:
The only time the insurance companies would not lose if they didn't invoke the co-insurance rule, would be in a total loss. As I stated earlier, most claims are not total losses. Thus, if you have a claim and it is for a partial loss, you would gain by paying a lower premium, and yet be covered for the full amount. I guarantee that if you have valuables in the amount of 100,000 and only insured for 50,000, if you had a claim for 25,000, you would tell the insurance company about the old file cabinets, and you would want to get paid. When someone else is paying, you always think that they are not paying enough, yet strangely when you are the one paying, you always think it's too much. Before I owned my home, I would ask the landlord to turn the heat up higher, while walking in my apartment in shorts. Now that I am paying the heating bills, I find that shorts are not appropriate winter clothes. ;)

From contributor D:
Contributor R is correct in what he is telling you, however, if you wish to exclude assets from a policy, it is possible. Just list the assets you want to cover, value them and get a rate on that package. Usually this is no problem. Anne Margaret insured her legs. It just has to be clear what specifically is being insured and the value attached.