I say dangerous because if you don’t understand it, you can get burned by your own uninformed decisions.
Long ago, when insurance came to be, an interesting "battle" took place …
Insurance companies determined that by taking a little bit of money (premium) from lots of people, they could afford to pay for huge losses of only a few of those people. Based on expected losses they decided how much premium to charge. And an assumption they
made was that everybody would insure their property fully.
Bad assumption! Policyholders quickly realized that most losses are small – rarely a total loss. So, instead of insuring their $100,000 building for $100,000, they insured it for less – risking that they wouldn’t suffer a total loss. This wrecked the insurance
companies’ ability to pay losses and be profitable, too.
So, the insurance companies invented "co-insurance" – which basically means – if you don’t insure the full value of your property, you’re going to share in the partial losses.For example
on a truck insurance policy (simplified for illustration purposes), if you have a truck worth $100,000 and insure it for $80,000, you’ve insured 80% of value. If there’s a total loss, you only get $80,000 because that’s the coverage limit you chose. That’s
NOT co-insurance. That’s coverage limits.
Co-insurance comes into play on partial losses. In this example, if you have a partial loss, of say $10,000, the insurance company will only pay $8,000 … because you only insured 80% of the full value and 80% of $10,000 is $8,000. You pay the other $2,000.
That’s a pretty compelling reason to insure to full value. There’s more to the story so please give us a call to make sure you are properly insured. Not all insurance companies use co-insurance clauses. Call us today to find out if there’s one in your policy.
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