What it means
Property policies often include a coinsurance clause, which requires the owner to insure the building or contents for a set percentage of its value, commonly 80%, 90% or 100%. This is separate from health coinsurance, where a patient shares a bill with the insurer.
If the owner carries less than the required amount, a penalty applies and every claim is cut proportionately. The owner then absorbs the shortfall, which can be a nasty surprise after a loss.
A waiver of coinsurance clause switches the penalty off. The insurer agrees to pay losses in full, up to the policy limit and after the deductible, whatever the relationship between the amount insured and the actual value.
Insurers grant it only with some safeguard. It may be tied to an agreed amount endorsement, where both sides sign off on the property's value in advance, or to a detailed statement of values.
For the buyer, the benefit is certainty and simpler claims. The cost is that values must still be kept up to date, because a policy limit set too low will simply run out, and the insurer may price the waiver into the premium.
Waivers also appear in blanket policies, where one limit covers several locations. In that case the insurer often waives coinsurance only if the owner files an accurate statement of values each year, so the benefit depends on good record keeping.
In practice
Real-world examples.
Example
A furniture wholesaler stores stock worth $2,000,000 in a leased warehouse and carries $1,500,000 of cover. Its broker negotiates a waiver of coinsurance with an agreed stock valuation, so a partial loss is paid in full and not reduced for underinsurance. The extra premium is small compared with the protection it provides.
Example
A hotel owner with a rising property valuation does not want to revise the policy every quarter. A waiver paired with an annually updated statement of values keeps claims straightforward while the premium is adjusted once a year. The owner avoids a mid-year dispute about whether the building was insured to the required percentage.
Example
A chain of dental clinics insures its equipment at replacement value. The risk manager asks for the coinsurance clause to be waived on the schedule of equipment so that a theft claim is not reduced if a recent purchase has not yet been added. She still updates the schedule every quarter so that the limits remain adequate.
Formula
Calculation
Recovery with the clause = (insurance carried / insurance required) x loss, less any deductible, up to the limit
Recovery with the clause waived = loss, less any deductible, up to the limit
Suppose a warehouse is worth $1,000,000 and the policy requires 80% coverage, so $800,000 is required, but the owner carries only $600,000. A fire causes a $100,000 loss. With the clause, the insurer pays 600,000 / 800,000 x 100,000 = 0.75 x 100,000 = $75,000 before the deductible, leaving the owner $25,000 short. With the clause waived, the insurer pays the full $100,000 before the deductible, because the loss is within the $600,000 limit. The difference of $25,000 is what the waiver is worth on this claim, and the owner may have paid a slightly higher premium to obtain it.Case study
Seen in the real world.
Stonebridge Printing is an illustrative, fictional print shop with machinery worth $900,000 and a policy that required 90% coverage, or $810,000. The owner carried $540,000 to save on premiums and did not notice the coinsurance clause.
After an electrical fire caused $200,000 of damage, the insurer applied the penalty. It paid 540,000 / 810,000 x 200,000 = about two thirds of the loss, which is $133,333, leaving the owner with a $66,667 bill.
The next year the company worked with its broker to agree a valuation and obtain a waiver of the coinsurance clause. The illustrative lesson is that a cheap policy can be an expensive one if the clause is triggered. Stonebridge now reviews its values every year and treats the waiver as a safety net, not a substitute for adequate limits.
Watch out
Common mistakes.
- Confusing property coinsurance with health coinsurance, when the two terms describe quite different arrangements.
- Assuming that waiving the clause lets the owner insure for any amount, when the policy limit still caps what the insurer will pay.
- Believing the waiver is automatic, when it must be written into the policy as an endorsement.
Questions
People also ask.
Does a waiver of coinsurance mean I can insure for less than the property is worth?
You can, but the limit is the most you will recover, so a low limit can still leave you short on a large loss.
Why would an insurer agree to waive the clause?
It usually does so when the value has been agreed in advance, when the premium reflects the extra risk, or when the buyer has a strong claims record.
What is an agreed amount endorsement?
It is an arrangement where insurer and owner settle the property value in advance, which suspends the coinsurance penalty for the policy period. It is the most common way a waiver is achieved in practice.
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