Why It’s So Important to Understand Insurance-to-Value and Coinsurance Clauses in an Inflationary Environment


It’s always important to understand insurance-to-value and coinsurance clauses. However, it’s really, really important to pay attention to these clauses in today’s inflationary environment.

The insurance-to-value clause states the amount of money you’ll receive from your provider if a covered event occurs while coinsurance is an agreement between an insurer and business owner to share the cost of a claim; it requires coverage to a specified value in order to receive full compensation in a loss situation. The valuation clause helps carriers determine the appropriate premium for the amount of risk they are taking on while coinsurance can reduce the cost of a premium based on the amount of risk an owner will absorb in the event of a loss.

Both of these should be a familiar part of your annual review—but they can get buried and lost in contracts and many forget to update then based on current events. If you’re in this boat, there is no time like the present for you and your broker to hone in on both of these important clauses.

Why now and what now?

If you don’t pay close attention to insurance-to-value and coinsurance, you might get less money than you think when you make your next claim. For instance, if the value of your property has risen significantly and you don’t have enough coverage on it, you will face a penalty. If you don’t adjust your coinsurance and insurance-to-value along with your property value, you might be in trouble when making your next claim.

Inflation continues to impact property values, which likely calls for an increase in coinsurance. Likewise, the replacement cost of any building has likely gone up along with materials and labor. While some commercial property insurance policies will waive coinsurance, many do not.

If you are uncertain about where you are at and where you need to be, your broker can help you understand and update your valuation and coinsurance clauses before it’s too late.