Have you ever heard of Co-Insurance before? If you’ve had a NY insurance claim, maybe you’ve heard of co-insurance, but it is within the realm of possibilities to believe that you haven’t. So let me tell you this…
Not paying attention to or setting an inadequate co-insurance percentage can be a Killer when valuing a loss payment.
Co-Insurance is one of those parts of your NY insurance policy that you blow right past… You look at the Building Coverage and Premium and move on.
What else matters on an ny insurance policy other than the premium, right?
Determining Co-Insurance Loss Payment
How good are you at Algebra?
Don’t worry I’m not going to melt your brain with Pythagoras’s Theorem… Just some simple division, multiplication and subtraction and we’ll be able to figure out real quick how much Co-Insurance is going to ruin your day.
The following equation is how ny insurance adjusters determine a loss payment (the payment you get after a loss…) when your policy is below the co-insurance percentage and is being valued at Actual Cash Value.
(DID / SHOULD) X LOSS – DEDUCTIBLE = LOSS PAYMENT
DID = The amount of insurance listed on your policy.
SHOULD = The Replacement Cost of the property X Co-Insurance percentage = The amount of insurance you “should” have been carrying.
LOSS = Total amount of property lost.
DEDUCTIBLE = Watch this video of Deductible.
LOSS PAYMENT = Amount of Cash you get after the loss.
Co-Insurance Example
Let’s say you purchase a nice six-unit rental property in wonderful Albany, NY for $325k.
All you care about is your initial investment so you tell your ny insurance broker you want $325k in coverage on the building.
Your ny insurance broker says, “I see where your coming from, but the replacement cost for building is $425k and there is 90% Co-Insurance Percentage on most rental property policies.”
You don’t care about the replacement cost because the difference in premium from $325k to $425k is $500 and you don’t want that extra premium eating into your profit…
So you purchase the policy for $325k and life is good…
UNTIL… bum… Bum… BUMMM! One of your downstairs tenants has a fire in their kitchen that spreads to the upstairs units which causes $100k in damage. So let’s find out how much your Loss Payment will be:
(DID / SHOULD) X LOSS – DEDUCTIBLE = LOSS PAYMENT
SHOULD = $425k X 90% = $382.8k
($325k / $382.8k) = 85% X $100k = $85k Loss Payment
The Rub
This means by insuring your property for less than the SHOULD amount (Replacement Cost X Co-Insurance Percentage) you just lost $15,000.
Looking back, would you rather have the $15,000 in loss payment or the $500 in premium? Make the right decision and insure your property to Replacement Cost or at-least within the Co-Insurance Percentage.
I could go farther in-depth on this issue but in the essence of not boring the crap out of you we’ll leave it here.
I hope you’ve gotten my point.
Thank you,
Ryan Hanley
P.S. If you have any questions or would like to discuss insurance on a building you own in New York State please call us at (518) 456-6688 or Click here to email us.
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