I have recently been encountering more instances where prospective clients have been burned by a Co-Insurance clause on their Physical Damage or Cargo policies. Co-Insurance can be a confusing thing to navigate and requires special attention to policy limits and the actual cash values of equipment and cargo than policies without Co-Insurance.
What is Co-Insurance?
It should first be explained exactly what Co-Insurance is. Co-Insurance is a device used by insurance companies to encourage policyholders to insure their property (i.e. tractor, trailer, cargo, building or contents) for amounts which are close or equal to the actual cash value of the property. In essence you are penalized if you do not carry “adequate limits.” Normally, an “adequate limit” is defined by the insurance company as somewhere between 80% and 100% of the actual cash value of the property (depending upon the policy verbiage.) If you do not carry the “adequate limit,” the insurance carrier will reduce your claim settlement in the event of a partial loss. Co-insurance does not apply to total losses.
How does it work?
Let’s use an example where a Physical Damage policy has an 80% Co-Insurance requirement. The actual cash value of the tractor in question is $100,000. The insured has it listed as $75,000 on his policy. Under the Co-Insurance clause, he would have needed to schedule it for a minimum of $80,000 in order for the Co-Insurance clause not to apply.
The tractor is involved in a covered loss that causes damage, but doesn’t total the tractor, and now the claims adjustor is determining how much to pay the insured. In this case he would take the amount of insurance the insured DID carry ($75,000) and divide it by what he SHOULD have carried ($80,000.) This factor (.9375) is now applied to the amount to be paid to he insured. Let’s assume that the damage totaled $50,000. This means that the amount paid would be $50,000 x .9375 less the deductible. So in this case, instead of receiving $50,000 less the deductible, the insured will receive $46,875 less the deductible. And there’s the burn. The client ends up “self-insuring” an additional $3,125.
Do your Physical Damage or Cargo policies carry a Co-Insurance clause? Not sure where to look to find out? Give us a call at (800) 596-TRUCK (8782.) Often times we can tell you without even looking at the policy verbiage if the insurance carrier has a Co-Insurance clause. In those cases where we can’t, a quick review of your policy will tell us for certain. Don’t get caught off guard.
Until next month,
Jeffery A. Moss, ARM
President