Avoid the Coinsurance Penalty When Making a Claim on Your Property Insurance

May 26, 2021
Avoid the Coinsurance Penalty When Making a Claim on Your Property Insurance

Have you made improvements to your home in the last few years? Remodeled the kitchen? Built a terrace? Changed the windows? In case of damage to your home, or its loss, the cost of rebuilding your property may have changed, whether because of improvements that you have made over the years or an increase in the cost of building materials and labor.

All the improvements and upgrades you have made may affect your insurance coverage. Your property insurance requires that you keep your property insured for a minimum percentage of the reconstruction or replacement value of your home. This percentage ranges from 80% to 100% of the replacement value, and it is known as the Coinsurance Clause. You will find this clause in the Conditions section of your policy, and it is related to the protection, or limit, of the insurance you have purchased. When the insured limit is lower than the minimum required by your policy, payment of your claim could be subject to a coinsurance penalty.

What is the insurance limit?

The insurance limit in a property-insurance policy is the maximum amount of money that the insurer will pay for a covered loss. Typically, the insurance limit in a property-insurance policy is based on the property’s replacement cost—that is, the amount of money needed to rebuild or replace your property with materials of equal or similar quality at the time of loss.

What is the insurance limit I should have?

As a property owner, it is common to make home improvements over the years. These improvements, along with inflation and an increase in labor costs, may have the effect of increasing the replacement cost of your home. However, if these improvements were not reported to your insurance agent or insurer, it is possible that the insurance limit you currently have is lower than it should be.

What effect does an increase in the insurance limit have on the cost of the policy?

As the insured limit increases, the cost of the policy increases, and that generates an additional commission for the insurance agent.

What is the coinsurance clause?

Your home insurance has a coinsurance clause, which is a value expressed as a percentage which represents the minimum required limit for which your home should be insured. In Puerto Rico, the coinsurance on coverage for the structure of the residence can be 80%, 90%, or 100%. This is the percentage you should insure as the minimum replacement cost of your home. For example, if your policy has a coinsurance clause of 80% and the replacement value of your home is $100,000, then you should insure it for a minimum of $80,000. If you do not have that minimum coverage when there is a loss, payment of your claim would be subject to a coinsurance penalty. Below you can find an example of the impact caused by securing less than the minimum replacement cost:

Replacement cost of the structure:       $100,000

Current Insured limit:                               $70,000

Damage to the structure:                        $10,000

Coinsurance clause:                                    80%

2% deductible ($70,000 x 2%):                $1,400

$70,000/$100,000 = 70% for $10,000 in damage ($7,000) minus $1,400 deductible = $5,600 payable for your claim. However, if the current insured limit were the actual replacement cost, the claim payment would have been for $8,600, or the full $10,000 for the damage minus the deductible of $1,400.

How can I avoid the coinsurance penalty?

It is important for you to review the limit on your property insurance periodically and determine whether the amount insured at that time is on a par with your home’s replacement cost. If you make improvements to your home, contact your insurance agent and tell him or her about them. Have the receipts for the remodeling or upgrades handy.

If it has been a long time since you have reviewed your insured limit, we recommend that you carry out a replacement cost evaluation. Choose a professional appraiser and tell him or her about all the improvements you have made to your property, including any equipment attached to the structure, such as solar water heaters, generators, water tanks, and so on.

If you are a Popular Insurance customer, you can arrange an assessment1 of the replacement cost of your home in order to update your insurance limits. The assessment will be made for a fixed cost.2 Call us at 787.706.4111.

1 An assessment of the replacement cost does not include an appraisal of your property’s market value. In fact, in some cases the replacement cost could be higher than the market value, or vice versa. An assessment of your property’s replacement cost is carried out in order to determine what it would cost to rebuild your property under current construction costs, and that number is used to determine your insurance policy’s coverage limit.

2 Fixed price valid for assessment of residential properties only. Taking advantage of this offer is optional. Interested customers may contact a certified appraiser of their choice directly for this service. Popular Insurance, LLC, serves only as an intermediary in making the payment between the insured and the appraiser and that service entails no commissions or any income whatever. Popular Insurance, LLC, could, however, receive additional commissions if you opt for increasing your policy’s coverage limit after the appraisal of your property’s replacement cost. After carrying out the assessment, customers are not required to endorse an increase or decrease in their insurance policy’s coverage. An increase in the insured limit will increase the cost of your policy.

Insurance products are not deposits, are not insured by the FDIC or any other federal government agency, are not guaranteed by Banco Popular de Puerto Rico, and may lose value. Popular Insurance, LLC, is a subsidiary of Popular, Inc., and an affiliate of Banco Popular de Puerto Rico.

Popular Insurance by your side.