Avoid coinsurance clause penalty in your property insurance

Q: I own the building that houses my practice, and I've been told I should insure it for more than its assessed value. Why is that, and how do I know how much to insure it for?

Being sure you've insured your building properly is a lesson some property owners learn only when they've submitted a claim and encountered the coinsurance clause in a policy. This is a standard clause that says if you insure your property for less than a certain percentage of its RC value-usually 80%-then you will be reimbursed for any loss or damage only for the percentage for which you are insured.

If you were to experience a $200,000 loss, you would recover an amount equal to $750,000 ÷ (0.80 × $1,000,000) × $200,000, or $187,500 (less any deductible), a penalty of $12,500.

Insurers have many valuation tools and resources for agents' use in developing cost estimates on the RC for your building. Find an agent or insurance company you trust for guidance on a proper valuation.

Answers to our readers' questions were provided by John W. Miller II, principal of Sterling Risk Advisors in Marietta, Georgia. Send your money management questions to medec@advanstar.com Also engage at http://www.twitter.com/MedEconomics and http://www.facebook.com/MedicalEconomics.