Insurance

December 19, 2023 Published by British Columbia Chapter - By Nicole Daniels

How to Avoid Co-Insurance with an Insurance Appraisal

From CCI BC Strata Connection Magazine, Volume 01, Fall 2023

A replacement cost appraisal can help prevent a coinsurance penalty on a property’s insurance policy by accurately determining the full replacement value of the property and the amount to be insured. If a co-insurance clause is present on your policy, you could be at risk of penalties and ineligible for full payouts in the case of a partial loss.

Understanding Co-Insurance

Co-insurance is a term commonly used in insurance policies. It refers to the cost-sharing arrangement between the insurance provider and the insured individual or policyholder. A co-insurance clause requires policyholders to insure their property for a specified percentage of its full replacement value, typically ranging from 80% to 100%. If the property is not insured to the specified percentage, a coinsurance penalty may be applied in the event of a claim.

To illustrate how co-insurance works and how it can impact strata, here are a few scenarios to consider. Suppose you sit on the strata council for a building that has a replacement cost of $1,000,000 and the property insurance policy has a co-insurance requirement of 80%. This means that the strata must insure the property for at least $800,000 to receive the maximum amount of coverage allowable. Instead, for various reasons, you choose to insure the property for only $600,000. In this scenario, the insurance company will apply the co-insurance formula to calculate the payout amount in the event of a claim.

Co-Insurance Formula

Claim payment = ([Policy limit / Required limit] x Loss Amount) - Deductible. The policy limit would be $600,000. The required limit is $800,000 (80% of the total replacement cost).

Example One

Partial Loss, Co-Insurance Requirement Not Met

There is a water leak in the building causing $200,000 worth of damage. The deductible is $5,000. Since the strata insured the property for only $600,000, the insurance company will consider the coverage to be insufficient. They will calculate the penalty for underinsurance based on the co-insurance formula. In this case, the calculation would be: ([$600,000 / $800,000] x $200,000) - $5,000 = $145,000. This means that the insurance company will only pay $145,000 for the claim, and the strata would be responsible for the remaining $50,000 out of pocket, plus the $5,000 deductible.

Example Two

Partial Loss, Co-Insurance Replacement Not Met

In the case of a property claim that results in a higher loss, the co-insurance clause can have a significant impact on the amount of reimbursement you receive from the insurance company. Consider there is a fire that results in damage to the building up to $750,000. The deductible is $25,000. Using the co-insurance formula: ([$600,000 / $800,000] x $750,000) - $25,000 = $537,500. Based on this, the insurance company would only reimburse you $562,500 for the claim, and the strata would be responsible for the remaining $187,500 plus the $25,000 deductible.

Example Three

Partial Loss, Co-Insurance Requirements Satisfied

In our next example, we will use the same metrics for a partial loss on a property that has a replacement cost value of $1,000,000 and a deductible of $25,000. However, in this case, we will assume that the strata has insured the corporation for $900,000 which would be the policy limit.

Using the same values, consider there is a fire that results in damage to the building up to $750,000. The deductible is $25,000. In this case, the policy limit exceeds the minimum required limit of $800,000 which means that a co-insurance clause or penalty would not apply. While on any loss, the insurance recovery is still capped at $900,000, any claim under that amount would be covered and the strata corporation would only pay the deductible.

Example Four

Total Loss, Insured to Value

In our last example, the strata corporation has insured the property to full replacement cost value at $1,000,000, as per their current insurance appraisal. The property experiences a fire and is deemed a total loss. The strata is sufficiently covered and is only responsible for paying the deductible.

Obtain an Appraisal to Avoid Co-Insurance

Co-insurance is designed to encourage policyholders to adequately insure their property. It serves as a mechanism to distribute risk between the insurer and the policyholder. Insuring your property to the full replacement cost can help avoid co-insurance penalties and ensure sufficient coverage in the case of a loss. Only a credible, experienced appraisal firm can reliably determine the full replacement cost of a property. When selecting an insurance appraisal firm, ensure they take into consideration the following factors in their estimates:

• They account for all hard and soft costs, demolition and removal costs, and costs for upgrading a property to meet current building codes and bylaws.
• They use real metrics and local cost guides that reflect the fluctuations in Canada’s construction market

Steps to Avoiding Co-Insurance

To avoid a co-insurance penalty on your strata’s insurance, make sure you are insuring your property to value and follow these steps:

1. Select an accredited, professional firm specializing in replacement cost valuations.
2. Obtain appraisals on an annual basis and insure your property to the full replacement cost amount.
3. Share the appraisal with your insurance provider at the time of the insurance policy renewal.
4. The co-insurance clause will be waived on your policy and you can have peace of mind that your assets are sufficiently protected in the case of a loss.

When placing property insurance and determining policy limits, remember that insuring to value can help your strata corporation avoid any potential co-insurance penalties when experiencing a loss. An insurance appraisal can not only provide peace of mind but also reduce the risk of significant financial loss.

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Nicole Daniels
Business Development Manager, Western Canada, Normac

Nicole works with property managers, strata councils, and insurance brokers to provide accurate and reliable replacement cost reports while upholding Normac’s reputation for comprehensive and reliable valuations, and exceptional customer service. She supports business development activities in a l Canadian and US markets and provides leadership for national and regional marketing objectives. Normac is Canada’s largest specialized insurance appraisal firm with appraisers who are extensively trained in a l areas of reconstruction costs.