Associations Should Review Their Policies To See If Their Insurers Have Made Them Responsible For A Share Of The Risk Of Loss - This Is Known As Coinsurance

Coinsurance is a provision in the insurance industry which allows an insurance company and its policyholder to potentially apportion between them any loss covered by the policy. This is usually according to a fixed percentage of the value for which the property is insured. In property insurance policies, the coinsurance clause provides that property must be insured for a specific percentage, usually 80% to 100% of its value. This means that the insurance company can shift part of the risk of loss back to the policyholder if the property is not insured to a certain ratio of the value of the property at the time of a loss. If the value of the property times the coinsurance percentage is greater than the limit of insurance for the property, then the insurer may apply a coinsurance “penalty” and may not pay the full value of that loss. Associations and all policyholders should periodically review their policies to determine if they are subject to a coinsurance percentage and to ensure that they are adequately insured for the value of their property according to any coinsurance percentage. This “penalty” can be huge for associations suffering a large loss in the event of a large catastrophe like a hurricane.

Typically, the insurance policy will explain the steps in calculating whether a “penalty” applies. It may be easiest to demonstrate how coinsurance works through hypothetical scenarios using some numbers. A policyholder has a policy providing $120,000 in coverage to the property, which is valued at $250,000. The policy has an 80% coinsurance provision reflected on the declarations page. If this property sustains a covered loss of $40,000, and has a $500 deductible, we would need to follow the steps pursuant to the policy to determine whether it is adequately insured to the agreed value, and whether a “penalty” would apply.

First, the value of the property at the time of the loss ($250,000) would be multiplied by the coinsurance percentage (80%), which equals $200,000. Next, divide the policy limit of insurance ($120,000) by the figure from step one ($200,000), which equals .60. Then multiply the total amount of the loss ($40,000) by the ratio from the second step (.60), which equals $24,000. In the last step, you would subtract any policy deductible ($500), which equals $23,500. Under this scenario, the property is not insured to the coinsurance percentage of 80% of the value of the property at the time of this loss so a “penalty” would apply and the insurer’s liability for that loss would be $23,500. The policyholder essentially would absorb the remaining $16,500 of the loss or would need to rely on other insurance for that portion of the loss. This is reflective of why it is referred to as a coinsurance “penalty.”

It is important for associations and all policyholders to periodically review their insurance policies with their insurance agents and professionals in the construction or risk management businesses to make sure they are adequately insured to the value of the property. Policyholders can even request that their insurance representatives check and confirm whether they would be subject to a coinsurance “penalty” under their policies if they were to sustain a covered loss at that time.

Is Your Hurricane Deductible and Coinsurance Provision Enforceable?

In a previous post, Failing to Obtain Regular Appraisals Can Hurt Associations After A Large Loss, I wrote about the negative effect that a coinsurance provision can have on an association’s ability to recover after a large loss. Equally as problematic, almost all policies issued in Florida contain a separate deductible which applies only in the event of hurricane damage. Instead of a small deductible, most “Hurricane Deductibles” are based on a percentage of the policy limits. These deductibles vary, depending on the policy and the association’s choices when purchasing the policy, and they can rise as high as 10%.

After Hurricane Wilma, many associations were pleased to learn that they had only suffered a small amount of damage. After learning the devastating effects that the storm had on many buildings, associations were grateful to incur damages of only a few hundred thousand dollars. Unfortunately for many, coinsurance penalties and high hurricane deductibles were applied, leaving associations without any recoverable proceeds to fix the buildings.

Florida Statute §627.701 authorizes and regulates coinsurance penalties and hurricane deductibles. Florida Statute §627.701(4)(a) states:

Any policy that contains a separate hurricane deductible must on its face include in boldfaced type no smaller than 18 points the following statement: "THIS POLICY CONTAINS A SEPARATE DEDUCTIBLE FOR HURRICANE LOSSES, WHICH MAY RESULT IN HIGH OUT-OF-POCKET EXPENSES TO YOU." A policy containing a coinsurance provision applicable to hurricane losses must on its face include in boldfaced type no smaller than 18 points the following statement: "THIS POLICY CONTAINS A CO-PAY PROVISION THAT MAY RESULT IN HIGH OUT-OF-POCKET EXPENSES TO YOU."

While the statute is clear that this language must be contained in the policy, it has become apparent since Hurricane Wilma that many insurers have failed to comply with the statutory requirements. Arch Specialty Insurance Company, QBE, and Citizens Property and Casualty Insurance Corporation, to name a few, all have issued policies that do not comply with §627.701.

Despite non-compliance with the clear language of the statute, many insurers have applied Hurricane Deductibles and Coinsurance Provisions to reduce, and in some circumstances avoid, claims payments.

There is ongoing litigation concerning whether non-compliance with Florida Statute §627.701 makes the hurricane deductible and coinsurance provision unenforceable. In fact, these issues are currently pending before the Florida Supreme Court in Chalfonte Condominium Apartment Association, Inc. v. QBE Insurance Corporation. Also, several class actions have been filed in order to recover monies improperly withheld because of Hurricane Deductibles and Coinsurance Provisions that did not comply with the statutory requirements.

The recourse sought by the policyholders in these cases are simple. If an insurer did not comply with the clear language of §627.701, the percentage Hurricane Deductible and Coinsurance Provision should not apply. Money improperly deducted should be returned and claims that did not meet the high deductibles should be paid.

The implications of this could be extremely beneficial to every association involved, especially those who were forced to conduct special assessments to pay for Hurricane Wilma damage.

All associations that suffered damage from Hurricane Wilma should check their insurance policies to see if the correct language is contained and whether it conforms to the statutory requirements. If not, you should consider contacting an insurance coverage attorney to determine whether you might have a cause of action.

Failing To Obtain Regular Appraisals Can Hurt Associations After A Large Loss

The second named storm of the year has crossed Florida, and it will only be a matter of time before another tropical system strikes the state. While there are many problems that an association can face after a loss, few are harsher than the effect of a coinsurance penalty that reduces the amount paid on an otherwise valid claim. Many policies, especially large commercial polices, contain coinsurance provisions. Unfortunately, many directors and managers do not understand what they mean or the effect that they can have.

Coinsurance provisions come in all shapes and sizes, but the most common are 80, 90, and 100% coinsurance provisions. These provisions are fairly easy to understand. Because an insured is supposed to carry enough insurance to replace the entire property after a loss, insurers will reduce the amount of coverage they provide if this is indeed not done. An 80% coinsurance provision means that an insured must have coverage for 80% or more of the replacement cost value at the time of the loss. Likewise, with a 100% coinsurance provision the insured must have coverage for 100% of the replacement cost value at the time of a loss.

If a property does not have enough insurance coverage to equal or exceed the coinsurance provision, the insurer may reduce the amount of recovery even if the cause and amount of the loss are undisputed. This is a harsh effect and may leave an association without the funds to properly repair the buildings.

There are two basic ways that an insurer will reduce payments under coinsurance provisions. First, an insurer may only pay the actual cash value of the damage instead of the replacement cost normally covered under the policy. While this may not seem too harsh for newer properties, failing to recover the depreciation can be a huge problem for older associations.

The second, and more common, coinsurance provision states that if the property is not insured to the required percentage, any loss can be prorated to the percentage of the insurance purchased. For example, if a policy had a 100% coinsurance provision, the building would need to be insured to 100% of its replacement cost value at the time of the loss. If only $100,000 worth of insurance was purchased but the Replacement Cost Value of the property was $200,000, the insurer would only be liable for 50% of the loss.

Thus, if there was a policy limits loss of $100,000 dollars in the above scenario, the insurance company would only be required to pay $50,000 because the property was only insured to 50% of its replacement cost value.

Many associations carry high coinsurance provisions for a number of reasons. Higher coinsurance provisions reduce premiums, which is enticing to many associations looking to save money in tough financial times. Also, many associations cannot imagine a total loss and believe that there is no need to fully insure the property. Others may not even know that the provision is in their policy. No matter what the reason, associations should always check the amount of the coinsurance provision and ensure that they are adequately covered.

If the association policy includes a coinsurance provision, it should be between 80 and 90%. Having a 100% coinsurance penalty is almost never recommended. Also, no matter what your coinsurance provision says, an association should make a habit of having professional appraisals performed on a regular basis. Having a qualified and unbiased third party determine the replacement cost of the property every few years will ensure there is adequate insurance on the property.