The Often Overlooked and Understood Requirement You Can’t Afford to Ignore
Oklahoma commercial property owners, make sure you take time to read this I’m about to save you from one of the most overlooked and misunderstood clauses in your insurance policy: co-insurance. This isn’t just some obscure clause to gloss over; it’s a critical component that can either secure your financial protection or blow up like a bad nightmare when you least expect it. Let’s break down what co-insurance is, how it works, and what happens if you fall short of meeting its requirements.
What Is Co-Insurance, and Why Should You Care?
Co-insurance is essentially a sharing agreement between you (the policyholder) and your insurance company. It’s most commonly found in property insurance, especially commercial properties. Here’s the kicker: co-insurance clauses are designed to ensure that property owners insure their properties to an appropriate value—typically close to its actual replacement cost.
Think of it this way: your insurance company is saying, “We’ll cover the big risks, but you’ve got to show us you’re serious by covering a fair portion of the property’s value yourself.” This is usually expressed as a percentage, such as 80%, 90%, or even 100% of the property’s replacement value.
Real World Examples: Down and Dirty Math
Suppose you own a commercial building in Oklahoma worth $1 million, and your insurance policy includes a 90% co-insurance clause. This means you must insure the building for at least $900,000. Here’s where many property owners trip up—they underinsure, thinking they’re saving money on premiums. But here’s how the math works against you if there’s a claim:
- Scenario: You decide to insure the building for only $700,000 to save a little money.
- Disaster Strikes: You have a fire, and the damage is assessed at $500,000.
- The Co-Insurance Penalty Kicks In: Because you only insured 77.8% of the building (700,000/900,000), the insurance company will only pay the same percentage of the claim. So, instead of covering the $500,000 damage, they only pay 77.8% of that amount, which equals about $389,000.
That leaves you, the property owner, to cough up more than $110,000 out of pocket. And just like that, the money you thought you saved on premiums has vanished into thin air—and then some!
Example 2: Partial Wind Damage
- Building replacement cost: $2 million
- Co-insurance requirement: 80% ($1.6 million)
- You only insured: $1 million
- Loss: $400,000 from a major windstorm
Because you only carried 62.5% of the required coverage ($1M / $1.6M), the insurance company only pays 62.5% of the loss. Instead of $400,000, you get $250,000. You’re left paying $150,000 yourself.
Example 3: Warehouse Fire Loss
- Warehouse value: $5 million
- Co-insurance requirement: 90% ($4.5 million)
- You insured: $3 million
- Loss: $1 million
Since you carried only 66.7% of the required coverage ($3M / $4.5M), the insurer pays just 66.7% of the $1 million claim—about $667,000. You’re on the hook for $333,000.
The Dreaded Underinsurance Impact
Failing to meet the co-insurance requirement means you can be out a ton trying to save a few dollars. It can undermine the financial stability of your entire investment portfolio. Think about it: can your business afford to shell out tens or hundreds of thousands when a disaster strikes? For most, the answer is a resounding no.
Think It Won’t Happen To You
In Oklahoma, where weather can go from balmy to biblical wrath in the blink of an eye, skimping on insurance isn’t just unwise; it’s downright risky. Tornadoes, hail, and severe storms are not if, they are a when. The damage they can cause is not something to gamble on either, we routinely see roofs destroyed, buildings blown away and entire roof top HVAC systems taken out.
The Bottom Line
As a property owner, your move is clear: Review your insurance policies annually with a professional who can help assess your property’s current replacement cost and ensure your coverage meets or exceeds the co-insurance requirements. This isn’t a set-it-and-forget-it deal. Property values change, construction costs increase, and your insurance needs to keep pace.
Take Action Now!
Don’t wait for disaster to find out you’re underinsured. If you’re not a client of ours, reach out now, Russ@okinsurancegroup.com. We can review, then evaluate your coverage and help adjust it to protect not just your property, but your financial future.
Don’t play roulette with your investments. Cover your assets correctly and sleep soundly at night knowing you have one less thing to worry about in today’s tough markets.