We are constantly bombarded by ads telling us that more is better. So when you are shopping for insurance, why would you want to get 80 percent when you could have 100 percent? Well, here is an instance where less might be more.
Many Property policies have a coinsurance clause. The coinsurance is indicated in percentages – usually 80 percent, 90 percent or 100 percent. You might logically assume that this number refers to the percent of the limit of insurance you would receive in the event of a loss. So, of course you want to have 100 percent available. However, this couldn’t be further from the truth.
Coinsurance refers to the amount of coverage you select in relationship to the actual value of your property. In other words, if the total value of everything in your salon in $100,000, and your coinsurance is 80 percent, the policy states you must carry at least $80,000 in coverage (100,000 X .8). Likewise, if your coinsurance is 100 percent, you must carry at least $100,000 in coverage.
As long as you carry the required amount of insurance, you are eligible to receive up to that amount in the event of a loss. However, if you under-insure — meaning that the amount of insurance you have does not match your coinsurance percentage —you will be penalized when you make a claim, even if the amount of your claim is well under the limit of insurance. The penalty is determined by how much you underinsure your business. In the earlier example, someone with a 100 percent coinsurance should have purchased $100,000. Maybe they felt that they would never incur a total loss, so they insured for less, say $60,000. They are now under-insured by 40 percent. Any claim payment, even a small one, would be reduced by 40 percent. A $10,000 claim with a 40 percent penalty would result in a $6,000 payment, and the deductible would still apply! That’s quite a difference.
The danger for most salon owners in having a policy at 100 percent coinsurance resides in timing. During your busy season you stock more product and bulbs than you do during the slow season. However, you probably insure for the average value. That means if your loss occurs when you have increased stock, you are at risk of suffering a penalty.
When you are determining the amount of property coverage you need, there are other factors you should keep in mind in addition to coinsurance. You also need to know if the Policy you are purchasing is at Replacement Cost or Actual Cash Value. Many salon owners insure for the original cost of their equipment and build outs, or they depreciate the value as their equipment ages. However, a Replacement Cost Policy requires you to carry the amount of insurance necessary to cover the cost of replacing everything brand new. Again, insuring at outdated or depreciated values could result in a coinsurance penalty.
While there are premium benefits to carrying higher coinsurance, the risks may outweigh them. You should always determine the amount of risk you are willing to take when selecting insurance coverage. You can certainly go with the least expensive, but in the long run you may regret it. If there is a term or coverage you don’t understand, be sure to ask your professional agent to explain it to your satisfaction. And, as my mother used to say, “Don’t be penny wise and pound foolish.”
