Co-Insurance: The Hidden Cost By Pete Giancola, CHFC, Pete Giancola Insurance Agency
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any associations today are insuring their properties and choosing insurance policies based solely on price. We continually hear “Get it cheaper” instead of “What would be the most logical thing to compare when choosing insurance coverage?”
Many times associations have no idea what their risks are or what they could be facing if they need the insurance carrier to step up and pay the claim. In many instances, they are faced with surprises in their policies that they didn’t know existed until the loss is severe. One of those items is “co-insurance.” Co-insurance, in the simplest terms, is when you, the association board, “shake hands” with the insurance company and both parties agree to insure your property or buildings together. (Obviously “we” the insurance company have more dollars.) Most associations deal directly with an agent or broker to determine building coverage. In our vernacular, this is the “Coverage A” coverage amount. However, when a claim is made, it is never the agent working with the client to determine the valuation of the loss. It is a claims adjuster from the insurance company who determines the proper valuation of the building coverage. The adjuster works with the client to determine the loss amount and payment. In many situations, a severe case of amnesia begins with the agent because nothing was communicated in writing or saved when the coverage was secured. Sometimes the management company’s property manager brings in a “favorite agent” due to that agent’s ability to manipulate pricing, rather than providing coverages and amounts in the association’s favor. Associations continually ask, “Can you strip coverages to get the policy cheaper?” But they rarely ask, “What am I giving up if you (the agent) remove that coverage?” Co-insurance is most commonly explained “did over should”: what did the association insure its structures for? And what should the association have insured its structures for? Here is an actual example that resulted in hundreds of lawsuits (see article included “Condo Insurance Shortfall Anchorage Alaska”). In this scenario, the condo association, with the help of its agent, determined $14.5 million to be appropriate coverage for two buildings. The association later hired a plumber who inadvertently set one building on fire, resulting in a total loss. The insurance company calculated the loss at $14 million — so they have enough coverage, correct? Incorrect!
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Minnesota Communit y Living
The adjustor (who arrives at the valuation only after the loss occurs) estimated the insurable value of the buildings to be $30 million. The policy showed $14.5 million, and here is where the math got interesting: The adjustor looked at the policy, and the declarations showed that the coverage included co-insurance. Immediately following the loss, the adjustor calculated that coverage on the buildings should have been $30 million. He multiplied this value by the association’s coinsurance percentage, 80 percent, and asked, “Was the association insured to at least 80 percent of the calculated replacement cost ($24 million)?” Answer: they weren’t! This replacement cost is the amount of coverage the association needs to have if it expects to receive the entire amount listed for coverage “A” ($15 million). So, the adjustor did what adjustors do best: he divided the $15 million dollars that the association had for its coverage by the $24 million (the co-insurance, per the applied 80 percent). The association’s coverage was 62.5 percent of what was required by the co-insurance ($15 million divided by $24 million = .625). Then the adjustor multiplied $15 million (the amount the buildings were insured for on the declarations page) by 0.625 to arrive at payment for the loss: $9,375,000. After deductions for debris removal and site preparation, each HOA member received a bill for around $90,000. Then the lawsuits flew. (Remember, the association was told it lost a $15 million dollar building.) Every association should be aware that laws change, and local ordinances might affect them in ways they never dreamed of. They should consult with experts each year to understand what those changes may be. It would be great to see people have the correct coverage in the right places when they are at risk of losing their largest asset — their home. If you know exactly what your coverage should be at the time of a loss, co-insurance would never apply!