Coinsurance is a very simple idea that is very complicated to explain.

It can also prove to be extremely costly to your theatre group.  Unfortunately, many do not find this out until it is too late; after they have already experienced a serious loss.  This makes coinsurance a very risky business.

Coinsurance was originally developed as a pricing incentive.  If you agreed to insure your property for its true replacement value based on current dollars, the insurance company would charge you a premium based on only a percentage of that amount.  Although policies vary, a typical coinsurance standard is 80%.

If the current replacement value of your building is $100,000, the insurance company wants you to insure it for at least $80,000.  If you do, you will be paid for a covered loss without penalty.  If you do not, you will only be paid a portion of the loss.

        Consider these three examples:

Coinsurance does not apply to total losses. If you insure your $100,000 building for $35,000 and it burns to the ground, the insurance company will pay you $35,000 (minus your deductible) for your loss.  In effect, you penalized yourself by grossly underinsuring your property.

Coinsurance does not apply to partial losses if you have met the coinsurance requirement of your policy. You insure your $100,000 building for $80,000 under a policy that has a coinsurance of 80%.  You experience a partial loss of $10,000.  The insurance company confirms that the current replacement value of your building is $100,000.  They pay you $10,000 (minus your deductible); the full amount of your partial loss.

Coinsurance only applies to partial losses where you fail to meet the coinsurance requirement of your policy.  You insure your $100,000 building for $50,000 but your policy carries an 80% coinsurance requirement.  You experience a $10,000 loss.  The insurance company confirms that the current replacement value of your building is $100,000.  They pay you $6,250 (minus your deductible).  The difference between $10,000 and $6,250 is the penalty you pay for your failure to meet your coinsurance requirement.

The critical part of the coinsurance process is when and how the replacement value of your property is determined.  Most policies are written so that the insurance company is allowed to determine the value of your property after you have already experienced a loss.

For example, you decide your building is worth $100,000.  You buy an insurance policy with a coinsurance of 80% and insure your building for $80,000.  As far as you are concerned, you have met the 80% coinsurance requirement.  You then experience a partial loss.  You file a claim and expect to be paid the full amount of that partial loss.  The insurance company comes in and determines that you were wrong.  At today's prices, your building is really worth $150,000.  You only insured it for $80,000.  You did not meet the 80% coinsurance requirement.  The insurance company penalizes you by paying you only a portion of your loss.

Without going into infinite details based on endless variations of this issue, it is very clear that coinsurance is a risky business.  The vast majority of all property claims are for partial losses; the precise kinds of losses where a coinsurance penalty may apply.

There is really only one way to avoid this risk. INSIST THAT YOUR INSURANCE POLICY BE WRITTEN ON A REPLACEMENT COST/AGREED VALUE BASIS. This eliminates the coinsurance requirement altogether so that all covered losses will be paid without penalty up to the limit established in your policy.

Be cautioned, however.  While replacement cost/agreed value eliminates the coinsurance penalty on partial losses, it is still in your best interest to insure your property at the full replacement cost amount.  In case of a total loss, you want the insurance settlement to be sufficient to pay the full cost of replacing your property.

For those of you who are current participants in the AACT-endorsed insurance program, let me remind you that your policies are written on a replacement cost/agreed value basis.

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