Valuation, Deductibles, and Coinsurance PDF

Valuation, Deductibles, and Coinsurance 1. Valuation 1.1 Intro: Valuation, Deductibles, Coinsurance Chapter objectives: Distinguish between the different methods of valuation. Define deductibles and how they apply to indemnification. Explain how coinsurance protects the insurer...

Valuation, Deductibles, and Coinsurance 1. Valuation 1.1 Intro: Valuation, Deductibles, Coinsurance Chapter objectives: Distinguish between the different methods of valuation. Define deductibles and how they apply to indemnification. Explain how coinsurance protects the insurer. Key Concepts: Actual Cash Value Replacement Cost Depreciation Three types of deductible Coinsurance It is impossible to adjust property claims without having a firm grasp of three important concepts: valuation, deductibles, and coinsurance. These three features play a key role In every insurance policy: they directly influence how much the insured pays in premiums, as well as how the insurer will pay out in the event of a loss. Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 1 In this chapter, we will discuss how adjusters use different methods of valuation to assess the value of a property. We will also introduce deductibles and explore how they can affect a claimant's indemnity. And finally, we will explain how coinsurance can protect an insurer financially. 1.2 Valuation Valuation The process of estimating what an item is worth 1. Actual Cash Value (ACV) 2. Replacement Cost (RC) 3. Agreed Value 4. Stated Amount Valuation is the estimation of an item’s worth. Before setting the terms of a property insurance policy, it is important for both insurer and insured to know the value of the property being insured. The term “property” refers to any physical or tangible object that can be owned. If it can be owned and valued, it is property. Valuation is important both at the outset of a policy and in the event of a loss. Insurers often base policy premiums on the value of covered property. Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 2 And if that property then becomes damaged or destroyed, the adjuster will also need to estimate its current value in order to process the insurance claim. These value estimates ensure that the policyholder will receive fair indemnification for covered losses, based on the terms of the policy. There are several types of valuation that can appear on a policy, including Actual Cash Value, Replacement Cost, Stated Amount, and Agreed Value. 1.3 Actual Cash Valuation Actual Cash Value A valuation method that takes into account an item’s depreciation Same as fair market value and depreciated value ACV offers lower premiums for less coverage Formula: Replacement cost minus depreciation The first valuation type is actual cash value, often expressed as “ACV” in the insurance industry. It is a valuation used by insurers to reflect the fair market value or depreciated value of an item before it was damaged or destroyed. For example.. Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 3  Bob’s 1995 Honda Civic had 130,000 miles and some dings and dents before he wrecked it. Even though he originally purchased the car for $13,000, his insurer paid only $1,700 on the claim, because the current actual cash value was only $1,700 due to wear, tear, and age. Because ACV coverage does not pay to fully replace or repair an item, ACV policies have lower premiums. The formula for determining Actual Cash Value is Replacement Cost minus Depreciation. To use the formula we need estimates for both the replacement cost and the depreciation on the insured property. 1.4 Depreciation Replacement Cost A method of valuation based on the cost of replacing an item at current market prices, regardless of depreciation Can be determined through simple market research Depreciation An item’s estimated loss of value due to wear, tear, and age Can usually be determined with: Standard Depreciation Schedules Estimating Software Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 4 Replacement cost is simply the amount needed to buy the item at today’s prices. This can easily be determined based on market research and investigation. Most items decrease in value over time. Depreciation is an item’s estimated loss of value due to wear, tear, and age. To estimate depreciation, insurers often provide adjusters with standard depreciation schedules and estimating software. A depreciation schedule is a list or table showing the depreciated value by age or year while depreciation estimating software calculates the depreciated value by age or year. Although an adjuster often uses software to estimate depreciation, it is necessary that you know the formula and how to use it. Next, we will look at an example. 1.5 Calculating Depreciation Annual Depreciation: replacement cost divided by the item’s useful life Accumulated Depreciation: the item’s annual depreciation multiplied by its age Two formulas are used for estimating depreciation. First, annual depreciation; second, accumulated depreciation. Annual depreciation is the Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 5 item’s replacement cost divided by the number of years of its expected or useful life. Accumulated depreciation is the item’s annual depreciation times its age. For example... Larry has a vacuum with a useful life of 10 years, and it is now 3 years old. A new vacuum today costs $100. The $100 replacement cost divided by the 10-years useful life results in $10 annual depreciation. $10 multiplied by its three years of use shows that Larry's vacuum has depreciated a total of $30 in value. Now, use the estimated depreciation to calculate ACV. The $100 replacement cost minus the $30 of accumulated depreciation gives the vacuum an actual cash value (ACV) of $70. Larry would be indemnified $70 in the event of an insured loss. 1.6 Broad Evidence Rule Broad Evidence Rule Used in some states ACV does not simply come down to RC minus depreciation Takes into consideration any evidence available to determine value While we discuss ACV, it’s important to note that some states employ the Broad Evidence Rule. Under this rule, any kind of evidence can be used to determine the ACV of the property in question. This means that in these states, determining the ACV doesn’t just come down to subtracting Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 6 depreciation from the replacement cost. All sorts of other factors could come into play. For example... If one were to determine the ACV of a house using the Broad Evidence Rule, one would take into account the location of the house, the original purchase price, and the market value, among other factors. 1.7 Replacement Cost Reproduction Cost Cost to produce an exact replica of damaged property in the same manner it was originally produced Characteristics of Replacement Cost: No depreciation Based on the replacement cost at the time of loss Higher premiums The second valuation type is Replacement Cost, or RC. It refers to the cost of repairing or replacing an insured item, based on the item’s value at the time of the loss. Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 7 Unlike ACV policies which do subtract depreciation, replacement cost policies do not. For this reason, many policyholders prefer replacement cost policies even though the premiums are higher. For example... If Sally’s $10,000 roof is destroyed in a storm after three years, an ACV policy would only indemnify her at the roof’s depreciated value. Instead, her RC policy would cover her for the complete cost of a new roof of the same quality at today’s prices (minus the deductible, of course). RC coverage is common in homeowners policies, but rare in auto policies. Reproduction cost refers to the current cost of reproducing an exact replica of the damaged property using the same materials, construction techniques, design, and quality of workmanship as that used in the original item. Be careful not to confuse reproduction cost with replacement cost! 1.8 RC and the Principle of Indemnity The Principle of Indemnity The insured cannot profit from a loss The insurer often will pay the full amount after the insured submits his proof of replacement. Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 8 Replacement cost valuations may seem to violate the “principle of indemnity” which states that an insured cannot profit from an insurance transaction because it replaces “old for new.” For example… If an insured suffers damage to her old, worn carpet, and the insurer pays the insured for brand new carpet, has not the insured “profited’? Not really, because the policy promises to indemnify—in this case, compensation adequate for new carpet. Insurers sometimes safeguard against over-estimating repair costs by first paying actual cash value, then, only after the policyholder replaces an insured item, the insurer pays the remaining difference upon proof of replacement. This way, the policyholder is prevented from simply pocketing any money beyond that actually needed to do the repair. Insurers sometimes also refuse to offer replacement cost coverage on certain items, especially ones that wear quickly, like carpet. 1.9 RC Example For example… Roberto’s hail-destroyed roof Replacement Cost (RC) of $10,000 Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 9  First check of $6,000 ACV Roberto replaces roof for $7,000 So, insurer sends second check of only $1,000 Total indemnity for Roberto: $7,000 Insurer saves: $3,000 Looking at another example, suppose Roberto has a Replacement Cost value policy, and his roof is damaged by hail. The adjuster estimates $10,000 to replace the roof, but—because of depreciation—he gives Roberto only $6,000, the actual cash value of the roof. The adjuster informs Roberto that he should send in all receipts when the roof has been completed, and he can receive a second check for up to an additional $4,000. But what if Roberto shops around and finds a roofer who will replace the roof for $7,000? In this case, the insurer will pay only an additional $1,000, not an additional $4,000, because Roberto was indemnified (that is, made whole) by only $7,000—he got his new roof. This method of “holdback”—paying ACV first, then requiring receipts for the remainder—saves the insurer money and protects against overpaying, thereby safeguarding the principle of indemnity. Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 10 1.10 Functional Replacement Cost Functional Replacement Cost Pays to replace an outdated, obsolete item with a functionally equivalent item - not an identical item Level of coverage falls between RC and ACV Sometimes it is either impossible or unnecessary to replace damaged property with an identical item. In these situations, the insurer will use functional replacement cost coverage, which provides a replacement item that is functionally equivalent, although not identical. This valuation method allows for replacement of an expensive or obsolete item with less costly materials or methods of construction that are similar in function to that of the original insured item. This coverage has lower premiums than full replacement cost coverage and may provide more coverage than actual cash value, depending on the covered property. 1.11 Obsolescence Obsolescence When something is no longer used or wanted, despite being in good working order Usually a result of a newer, improved alternative Causes rapid depreciation Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 11 One factor that often comes into play when determining functional replacement cost is “obsolescence.” Obsolescence takes place when an object, service, or practice is no longer wanted or used, even though it may still be quite functional. Generally, obsolescence is a result of the availability of new, better alternatives, and it makes the older, obsolete item depreciate even faster. For example... Lath and plaster was a very common construction process for wall coverings up until the late 1950s. However, it became obsolete after the introduction of drywall—a quicker, cheaper, and more efficient construction method. Other examples include the obsolescence of the VCR after the invention of the DVD, and the obsolescence of the portable CD player after the invention of MP3s. 1.12 Valued Policy Valued Policy (a.k.a. Agreed Value or Guaranteed Value): Value is determined prior to the issuance of a policy Avoids the confusion of assessing appreciation or depreciation The third and final valuation type is a valued policy (also called a guaranteed value policy). Valued policies are insurance policies where the Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 12 insurer and the insured agree to a specific value for an item, appraised at the inception of the policy. If and when the item is lost or destroyed, the insurer pays the exact amount of the item’s appraised value. Valued policies often are used to insure items whose value is difficult to quantify, such as antiques or fine art. The value of these items could either depreciate or appreciate over time. Depreciate meaning decrease in value; appreciate meaning increase in value. A valued insurance policy avoids the difficulty of assessing value by establishing a fixed amount prior to the issuance of the policy. For example... Appraised value of an antique Jukebox: $25,000 Valued policy: $25,000 Policyholder’s indemnification after loss or damage: $25,000 (less the deductible) 1.13 Stated Amount Stated Amount (Stated Value) Property value is stated by the insured when applying for insurance When loss occurs, policy pays up to the stated amount or ACV, whichever is less Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 13 A stated amount (also called a stated value) is the value that the insured claims an item is worth when applying for an insurance policy. The policy premiums are then based on this stated value. However, in the event of a loss, the insurer will determine the ACV of the damaged item and typically pay the lesser of the stated amount and the ACV. For this reason, it is very important for the policyholder to be as accurate as possible when stating the value of the insured property. 1.14 Agreed Value vs. Stated Value Agreed Value Stated Value Insured is paid the agreed Lower premiums amount, regardless of ACV Good choice if insured can’t afford to insure an item for its full value You might wonder why anyone would choose to purchase a stated value policy, when she could buy an agreed value policy. After all, why give the insurance company the option of only paying the ACV, which might be lower than the amount previously settled upon? People choose stated value policies over agreed value policies if they want to pay lower premiums, or if they can’t afford to insure an item for its full worth. Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 14  For example… Evangeline inherited her grandfather’s collection of rare coins. She wants to insure the collection, but can’t afford a policy that will indemnify her for their full value of $400,000. She can choose a stated amount of $100,000, and maintain some peace of mind while paying more reasonable premiums. 1.15 Partial vs. Total Loss Partial Loss When insured property is only partly damaged, and repair costs fall within the policy limit Total Loss When insured property is damaged so badly that it is not worth repairing Two types: Actual total loss Constructive total loss Valuation can also affect whether an insurer treats damaged property as a total loss or only as a partial one. A partial loss is just what it sounds like: it refers to when an insured item gets partially damaged, and the cost of repairs falls within the insurance Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 15 limit. For example… If Bill’s bathroom floods, but the rest of the house is still fine, the damage to the bathroom would be considered a partial loss. By contrast, total loss refers to when an item is so badly damaged that it is not worth repairing. There are two kinds of total loss: actual and constructive. Total Loss: Actual vs. Constructive Actual Total Loss When property is completely destroyed and unrepairable Constructive Total Loss When the cost of repairing damaged property is higher than the property’s current value Sometimes used when repairs would cost more than the policy limit The insurer may keep the damaged property or deduct its salvage value from the claim An actual total loss occurs when the covered property is completely destroyed beyond repair. Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 16  For example… A house that is flattened by a tornado would be an actual total loss, and so would a car that gets so smashed in a collision that body shops could not fix it, even if they tried. By contrast, a damaged item is a constructive total loss if it could be repaired, but the repairs would cost more than the item is worth. For example… Say you drive an old car that is only worth $2,000. If you get into an accident and the body shop estimates that the repairs will cost $3,500, your insurance company will probably not pay for those repairs. Instead, it will declare your car a constructive total loss, since the cost of restoring it to its pre-accident condition would cost more than the car’s current value. An insurance company may also declare damaged property a constructive total loss if repair costs are higher than the available policy limit. Either way, when an insurer declares a constructive total loss, it will either take over the damaged property or subtract the salvage value from the claim. Salvage value is the amount of money you could get by selling the item’s parts to a junkyard or salvage dealer. 1.16 Review: Valuation Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 17  Valuation: the process of estimating what an item is worth Depreciation: an item’s loss of value due to wear, tear, age, or obsolescence Actual Cash Value (ACV) Pays the depreciated value of the item right before the loss occurred Formula: ACV = Replacement cost - accumulated depreciation Replacement Cost (RC) Pays to replace damaged item at current market prices No depreciation Valued Policy (Guaranteed Value) Assigns a set value to each insured item Stated Amount Insured states value of insured item up front, and after a loss, the policy pays the lesser of ACV or the Stated Amount Actual Total Loss Actual total loss: when the insured item is completely destroyed beyond repair or recovery Constructive Total Loss Constructive total loss: when damage would cost more to repair than the insured item is worth Let’s take a moment to review the different types of valuation. Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 18 Actual cash value calculates the depreciated value of an item at the time the loss occurs. ACV is calculated by taking the item’s replacement cost and subtracting its depreciation. Replacement cost valuation replaces the damaged item at current prices, without depreciation. Valued policies set a predetermined value on each insured item when they are first insured. A stated amount is the value of an insured item that’s based on the policyholder’s statement at the time of application. But, in the event of a loss, the insurer will only pay up to the ACV or the stated amount, whichever is less. Property is called an actual total loss when it is completely destroyed and cannot be repaired. A constructive total loss, on the other hand, means that the property could be repaired, but the damage is so extensive that the cost of repairing it would exceed the value of the property. 2. Deductibles and Coinsurance 2.1 Deductibles Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 19  Deductible The amount the policyholder must pay out-of-pocket before the insurer will pay for losses Lets the policyholder decide how much risk he is willing to take Found on the declarations page of an insurance contract Three Types: 1. Fixed 2. Percentage 3. Franchise Note: Liability Insurance never has a deductible, except in very rare cases. Now we will analyze deductibles and how they apply to the execution of an insurance contract. A deductible is a predetermined amount that a policyholder must pay in order to activate the financial benefits of an insurance policy. Originally, deductibles were established to avoid processing minor and easily affordable claims through an insurance company. Today, deductibles are also used to provide consumers more choice in the amount of risk they are willing to take on an insured item. If the policyholder elects to take on more risk, he’ll lower his premium but raise his deductible. If he wants to take on less risk, he raises his premium which lowers his deductible. Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 20 One important thing to note is that liability insurance never uses deductibles, except in very rare circumstances. We will now review three types of deductibles: fixed, percentage, and franchise. 2.2 Fixed Deductible Fixed Deductible A specific, set amount A fixed deductible is one specific, predetermined amount that a policyholder must pay out-of-pocket before he can be indemnified. For example... Tom’s car suffers $3,500 worth of damage and he has a $500 fixed deductible on his auto insurance policy. Tom will receive $3,000 from the insurance company because of his fixed deductible of $500. 2.3 Percentage Deductible Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 21  Percentage Deductible The insured pays a percentage of the insured risk’s value Some policies combine fixed and percentage deductibles. Percentage deductibles require the insured party to pay a deductible equal to the percentage of the value of the insured risk. For example... If Karen insures her home for $500,000, and the deductible on the homeowners policy is set at 3%, her deductible is $15,000. This means that Karen is responsible for paying the first $15,000 of a damage claim before the insurance company will pay the rest. If the total damage on Karen’s home is less than $15,000, she is responsible for 100% of the damages. Some policies will use a combination of fixed and percentage deductibles. An insurer may allow a $500 fixed deductible for fire and hail damage but charge a percentage for wind and tornado damage. 2.4 Franchise Deductible Franchise Deductible Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 22  Policy kicks in only after the loss exceeds a predetermined amount If losses are below the deductible, the insurer pays nothing If losses are above the deductible, the insurer pays 100% of the damage A franchise deductible states that the policyholder only pays for damages that are less than his deductible. If the cost of damages equals or exceeds his deductible, the insurer pays the full amount and the policyholder pays nothing. Franchise deductibles are primarily used in very large insurance contracts, but for simplicity sake, we will look at a more basic example. For example… If a policy comes with a franchise deductible of $1,000, and the insured item experiences $1,200 worth of damages, the insurer pays $1,200 and the policyholder pays nothing. If, however, the total cost of damage is $700, the policyholder pays the full amount. Franchise deductibles are seen most often in marine insurance. 2.5 Coinsurance Coinsurance: Encourages the insured to purchase an adequate amount of coverage, typically at least 80% of a property’s value Financially protects the insurer Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 23  Imposes a penalty on coverage for partial losses if the property is not fully insured - 80% of its RC Another important concept in property insurance is coinsurance. Insurers want sufficient premiums, and insureds want sufficient coverage. Both are achieved when properties are fully insured. Typically, insurers define “fully insured” as 80% of the cost to rebuild the principal structure from the ground up if it were to suffer a total loss. For example... If Bob’s home is valued at $100,000, Bob must insure it for at least $80,000 to be fully insured. When a homeowner is fully insured, his partial losses are 100% covered minus the deductible. However, if the property is insured for anything less than $80,000, it is considered underinsured. The coinsurance clause in insurance policies requires full insurance if claims are to be fully paid by the insurer. If the property is less than fully insured, the insured is considered a “co-insurer,” meaning that he is insuring his property with the insurer, and sharing in the cost for losses. A mortgage company will require a homeowner to be fully insured. Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 24 2.6 Coinsurance Penalty Underinsured: when a home is insured for less than 80% of its value Coinsurance penalty: if a property is underinsured, the insurer will only cover a percentage of partial losses If multiple partial losses occur, the low premiums are not enough for the insurer to cover all the damages The insurer decides if a coinsurance penalty should be applied If the insured fails to fully insure his home, he is exposing himself to a penalty called a coinsurance penalty. When properties are underinsured, premiums are inadequate. Ideally, policyholders do not expect to experience a total loss, and they assume that any partial losses they may suffer are fully covered because they fall under the policy limit. However, even in the event of a partial loss, the inadequate premiums may result in an inadequate payout by means of a co-insurance penalty. Consequently, the insurance company will only pay a percentage of partial damages. By means of the coinsurance clause, the proper relationship between premiums and payouts is achieved. Coinsurance maintains both the insurer’s financial health and the insured’s financial obligation. Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 25 The decision to apply a coinsurance penalty is typically at the discretion of the insurer, not necessarily the adjuster. One fact we should note here is that some policies may not include a “coinsurance” clause per se, but they will often have a similar “loss settlement” provision, which works in the same way: that is, it makes sure that an under-insured property will only get partial coverage for partial losses. The homeowners policy is a good example of this. 2.7 Applying the Coinsurance Penalty For example... Value of Betty’s home: $100,000 Minimum coinsurance amount: $80,000 Betty’s actual coverage: $40,000 1. Calculate coinsurance penalty $40,000 (actual coverage) ----------------------------------------------- = 50% $80,000 (coinsurance requirement) 2. Apply penalty to partial losses The home suffers a partial loss of $10,000 Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 26  Coinsurance penalty: 50% Insurer will only pay $5,000 (50% of $10,000) Let’s explore this concept of Coinsurance with an example: Betty’s house would cost $100,000 to rebuild. Her coinsurance clause requires 80% or $80,000. Betty’s house is 50% underinsured, because she has only a $40,000 insurance policy. This is only half of her required insured value of $80,000. Now, suppose Betty’s home suffers $10,000 in hail damage. $10,000 is under the policy limits. Yet, because the dwelling is under insured, the collected premiums were based on $40,000 not $80,000. Therefore, when the under insurance is discovered, the insurer may impose a coinsurance penalty on Betty, which reduces the payout. The formula for applying the coinsurance penalty is expressed in these simple terms: “had” over “should” times the loss. “Had” means how much insurance the insured had at the time of the loss. The “should” means how much the insured should have had. In Betty’s case, the “had” of $40,000 is divided by the “should” of $80,000 and equals 50%. This 50% is multiplied by the loss of $10,000 and results Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 27 in a co-insurance penalty to Betty of $5,000. The coinsurance penalty makes up for Betty’s inadequate premiums. 2.8 Coinsurance and Deductibles For example... Coinsurance requirement: $150,000 Betty’s policy limit: $120,000 Deductible: $2,000 Coinsurance formula: $120,000/$150,000 = 0.8 So, policy will pay 80% of a claim Covered loss: $10,000 Coinsurance and Deductibles: Which Comes First? Deductible first: $10,000 - $2,000 = $8,000 $8,000 x 0.8 = $6,400 Coinsurance first: $10,000 x 0.8 = $8,000 $8,000 - $2,000 = $6,000 When applying a coinsurance penalty to a claim, do you apply the deductible first, or does the deductible come after coinsurance? This is important, since the two methods will produce two different claim amounts. Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 28 Let’s look at an example of how this happens. Say Betty’s home needs $150,000 of coverage in order to meet the policy coinsurance requirement, but Betty only buys a $120,000 policy. The coinsurance formula would look like this: $120,000 divided by $150,000 (which comes to 0.8) times the loss. If Betty’s home sustains $10,000 in covered damage, and her policy has a $2,000 deductible, there are two ways you could calculate the claim payment. You could take the covered loss of $10,000, subtract the $2,000 deductible first, and then apply the coinsurance provision to the remaining $8,000. $8,000 x 0.8 = $6,400. Alternatively, you could take the covered loss of $10,000 and apply the coinsurance provision first. $10,000 x 0.8 = $8,000. Then, when you subtract the $2,000 deductible, you get $6,000. As you can see, the final amount can depend on which provision applies first. Unfortunately, there is not a simple answer to this question. Some policies specify that coinsurance applies after the deductible, and some say that it should come first. Some don’t specify one way or the other (in which case you should usually apply the deductible first, since that will produce a slightly higher claim payment. Remember that ambiguities in an insurance contract typically favor the insured.). Always be sure to read the Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 29 coinsurance and loss settlement provisions carefully when handling claims like this! 2.9 Review: Deductibles, Coinsurance Deductible Predetermined amount of money that a policyholder must pay before the insurance company will pay the remaining costs 1. Fixed: a set amount 2. Percentage: a percentage of the property’s value 3. Franchise: insurer pays 100% of damages if losses exceed a certain set amount Coinsurance Imposes a penalty if the homeowner does not insure home for at least 80% of its worth Coinsurance Penalty Equation “Had” divided by “Should” times the partial loss In this chapter we introduced the three types of valuation, actual cash value, replacement cost, and valued policies. We also explored the three types of deductibles, and the purpose and use of coinsurance. Let’s review these concepts briefly. Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 30 A deductible is the portion of the cost of the loss that an insured must absorb before the insurer will provide any indemnification. There are three types of deductibles. Fixed deductibles are a set dollar amount, while percentage deductibles are a percentage of the insured property’s value. A franchise deductible is a set amount. When damages are less than that amount the insurer pays nothing, but when damages exceed it, the insurer pays the entire claim, and the deductible “disappears.” Finally, coinsurance protects both the insurer and the insured by requiring policyholders to fully insure their property. This way, the insurer stays in business, and the insured is fully covered. Copyright © 2012-2024 COR Enterprises LLC dba AdjusterPro and All-Lines Training 31