Co-Insurance
Definitions, Purpose
and Applications
John
L. Davis
Definitions:
The
author of one dictionary of insurance terms described a co-insurance
clause as "Too hard to describe in few words to put in
a glossary."1
Such clauses are not infrequently misconstrued,
unjustly criticized, violated, or simply ignored.
Co-Insurance is, nonetheless, a venerable and fundamental
feature of the commercial property insurance landscape.
It is, therefore, important for industry participants
to maintain a working knowledge of its role in the underwriting
and claims adjustment process.
The
potential for misconstruction can be mitigated by reflection
on various definitions of co-insurance clauses which have been
formulated. A coinsurance clause has been succinctly defined
as follows:
It is
a provision requiring the insured to carry insurance on the
property insured in an amount equal to a stipulated percentage
of its value, or in a stipulated amount. If the insured fails
to carry sufficient insurance to satisfy the provision, he becomes
an insurer of the amount of the deficiency and must contribute
rateably to the loss. Such clauses are common in fire, burglary
and some types of inland transportation policies.2
The
author who had found the concept of a co-insurance clause too
hard for a glossary defined it anyway as:
A provision
in a policy whereby the company's payment is limited to that
proportionate part of the loss which the insurance bears to
the total value or to an agreed percentage of the total value.3
Purpose:
It was
said in one Ontario case that:
The
purpose of a co-insurance provision is to limit the liability
of the insurer and must therefore be seen as included for its
benefit. The burden of proof, ... rests with the
insurer to satisfy the Court how, and to what extent, the insured's
claim is to be reduced.4
The
effect of the clause, undoubtedly, is to limit the Insurer's
liability. However, one might contest the view that
this is an appropriate characterization of its purpose.
The
primary purpose of the clause is directed to fairness in premium
charges5 and the avoidance of underinsurance.
The insurer is able to agree to a lower premium rate
for premises or operations insured close to value, than that
applicable in the absence of coinsurance.
Most
losses are partial losses. Suppose there are two warehouses
owned by A and B respectively, having a value of $2 million
each, carrying fire insurance at (say) $300.00 per each $100,000.00
of insurance. A’s warehouse is insured to 80 percent or $1.6 million, at
a premium of $4,800.00. B's warehouse is insured for only $500,000.00
at a premium cost of $1,500.00.
Without co-insurance, in a partial loss of $300,000.00,
where the loss is fully paid, A will be paying more than three
times the premium paid by B for the same loss settlement.
Co-insurance,
therefore, equalizes the positions of the two insureds, by offering
an incentive for B to increase his coverage to meet the co-insurance
percentage required by the policy, or to negotiate, if feasible,
for a higher premium with the co-insurance provision deleted.
There
is a public policy benefit to having insureds insure at or close
to value. Without co-insurance, insureds would be
more inclined to wager on the occurrence of only a partial loss. This would reduce underwriting revenues
to the extent that the purchase of full coverage insurance would
be rendered very costly.
Applications:
IFC
Commercial Fire Form No. 11013 provides, with respect to co-insurance:
...The
insured shall maintain insurance concurrent in form, range and
wording with this Policy on the property insured to the extent
of at least the coinsurance percentage shown of the actual cash
value thereof, and, failing so to do, shall only be entitled
to recover that portion of any loss that the amount of insurance
in force at the time of loss bears to the amount of insurance
required to be maintained by this clause.
Problems
sometime arise where replacement cost ("RC") coverage
is provided. Different co-insurance factors may be
generated as a result of the RC appraisals than those for "actual
cash value" ("ACV"). It has sometimes been suggested
that if the policy is written on an RC basis, and the insured
elects to accept an ACV settlement, it should not be subject
to co-insurance. Alternatively, situations arise where
the RC coinsurance factor is more Draconian than that generated
by the ACV figures, and the suggestion is made that the RC co-insurance
factor should be applied to the ACV settlement.
And, sometimes, it has been suggested that an ACV coinsurance
clause should apply to an RC settlement.
As always,
the particular policy to rebuild in circumstances of an RC Endorsement
which does not include a co-insurance provision, is not subject
to a reduction in its claim even though such a reduction would
have applied to an ACV settlement.
An insurance
broker ignores the effect of co-insurance at its peril. In one
case, the plaintiff settled its fire claim with the insurers.
It was held that the plaintiff was not unreasonable in settling
because of the potential application of the co-insurance clause.
1 Gerald R. Heath, Insurance Words and Their Meanings (10th ed.)
2 Questions and Answers For Examinations For
Applicants For Insurance Adjusters' Licences, prepared by
Department of Insurance, R.B. Whitehead, Q.C. - Superintendent;
Baptist Johnston, Printer to the Queen's Most Excellent Majesty,
October 1954.
3 Gerald R. Heath, supra, n. 1, p.28.
4 Jauvin v. Prevoyants Du Canada; Prevoyants
Du Canada Assurance General (third party) (1986), 23 C.C.L,.L
103, at p. 126.
5 See, e.g., Property Insurance
Course, Lesson 6, Commercial Forms, The National Underwriter
Company (1981) (Cincinnati, Ohio).
|
