Co-Insurance is a clause imposed on most industrial asset insurance policies that requires you to insure your asset up to a determined limit of insurance (usually 80%-90%, sometimes 100%). This means that if you you fail to insure your asset to full value, you have come to be a "Co-Insurer" on your asset & in the event of a claim you could be seeing at a penalty.
Now we understand that if we under-insure our property, in the event of a total loss, we are short the difference. Take that same notion & apply it to a smaller loss:
Example: Actual construction Value 0,000
Building Insured for 0,000
Co-Insurance Clause 90%
Fire Loss ,000
In this example the insurance course states that you must be insured up to 90% of the value of the asset (building) (0,000 x 90% = 0,000). You only have the construction insured for 0,000 thus leaving you under-insured by 33 1/2%.
You have a fire loss totaling ,000. Because you were under-insured, the insurance company will sacrifice the whole paid on the loss by the same ratio that you are under-insured. In this case, the insurer would sacrifice the payment by 33 1/2% and pay you ,000. As the "Co-Insurer" you are responsible for the remaining ,000.
So always be aware of the co-insurance clause on your policy. My hint is that you pay to get appraisals done on your asset every few years and ask your broker to move you to "Stated whole Co-Insurance". Most insurers will move you to this stated whole co-insurance in return for a copy of the estimation and a signed Statement of Values. This binds the company to agree that there will be no penalty for under-insurance on partial losses as it proves to them that you have done your best to ensure your values are adequate.
The most leading point is to remember that the onus is on you to ensure that your values are adequate. Even if you have had help from your broker or someone else surface source in determining the value of your property, in the event of a covered loss, the insurers are truly only just taking your word for it at the end of the day. It means nothing to them if you under-insure your property, that's why they have this clause to safe them. Who's protecting you?
What is That Co-Insurance Clause on My Policy?