Are You Sure Your Business Property Is Fully Insured? A Policy Clause You Need to Understand
- Kevin Bui
- Oct 5
- 3 min read
You’ve done the responsible thing; You bought Business Personal Property (BPP) insurance to protect the equipment, inventory, and furniture that keep your business running. If a fire or a major theft occurs, you’re covered, right?
Maybe not as much as you think.
What if we told you that even if you have a $200,000 loss and a $300,000 policy limit, your policy might only pay a fraction of your claim? It can happen, and it's usually because of a standard part of most property policies called the coinsurance clause.
Understanding this clause is one of the most important things you can do to ensure your policy can fully protect you when you need it most.
What is the Coinsurance Clause?
Think of the coinsurance clause as a partnership agreement built right into your policy. In exchange for a more favorable premium rate, the policy is designed with the understanding that you agree to insure your property for a certain percentage (usually at least 80%) of its total current value.
When your end of the agreement is met, your policy can respond as expected, paying your claims in full (up to the policy limit). But if the property is insured for less than that agreed-upon percentage, you essentially become a "co-insurer," and your policy requires you to share in the cost of the loss.
How Coinsurance Works: A Real-World Example
This is where an honest valuation becomes so important. Let's break it down with a simple scenario.
Imagine a business owner, let's call her Jane.
Actual Value of Jane's Business Property: Jane does a full inventory and realizes the true replacement cost of all her equipment, furniture, and stock is $500,000.
Coinsurance Requirement: Her policy has an 80% coinsurance clause.
Coverage She Should Have: To meet the clause, Jane needs to insure her property for at least $400,000 ($500,000 x 0.80).
But Jane bought her policy two years ago and, trying to keep her premium down, only insured her property for $200,000. She never updated it as her business grew.
The Disaster: A fire breaks out, causing $150,000 in damage. Jane files a claim, thinking that since her loss is less than her $200,000 policy limit, she'll be fully covered.
The Policy Calculation: To determine the payout, the coinsurance formula is applied:
($200,000 / $400,000) * $150,000 = $75,000
The Result:
Instead of receiving a check for $150,000, the final payout from the policy is $75,000 (minus her deductible). Jane is now responsible for paying the remaining $75,000 out of her own pocket to replace everything. This unexpected expense could be devastating for her business.
How to Make Sure You're Covered Correctly
The good news is that ensuring your policy works as intended is straightforward. The key is to make sure your BPP coverage limit accurately reflects the current value of your assets.
Conduct a Thorough Inventory. Don't guess! Create a detailed list of all your business property. Be sure to include:
Furniture and fixtures (desks, chairs, shelving)
Computers and electronics
Specialized machinery and equipment
Inventory and raw materials
Improvements you've made to a leased space
Calculate the Correct Value. For most policies, you'll want to use the current replacement cost, not the depreciated value. What would it cost to buy everything new today?
Review Your Coverage Annually. Your business isn't static, and your insurance policy shouldn't be either. As your partners, we recommend reviewing your BPP values with us every year before your renewal. Did you buy a new machine? Did your inventory grow? Let's make sure your policy grows with you.
Don't Wait for a Claim to Find Out You're Underinsured
The coinsurance clause isn't a penalty; it's a mechanism that helps keep rates fair for everyone who buys coverage. By working together to set an accurate value for your property, we can ensure you avoid any costly surprises during your moment of greatest need.
Let us help you get it right. Contact our office today for a complimentary review of your Business Insurance. We'll help you calculate the true value of your assets and make sure your policy is ready to protect you.
Comments