ISO INLAND MARINE COINSURANCE PROVISIONS
Coinsurance is commonly used in many lines of insurance and inland marine is no exception. A coinsurance penalty is applied whenever the limit of insurance provided for a specific property or coverage is less than the result of the total value of that insured property that is subject to the coinsurance condition multiplied by the coinsurance percentage.
Related Court Case: Coinsurance Provision in Motor Truck Cargo Liability Policy Not Ambiguous
It is important to note that one type of property that is often not subject to coinsurance is property while it is in transit. Other types of property may also be specifically removed from the coinsurance provision.
The following are the steps to determine if a coinsurance penalty applies:
Step 1: Determine the value of items, at the time of the loss, of all covered property that is subject to coinsurance.
Step 2: Multiply Step 1 by the coinsurance
percentage on the declarations.
Step 3. Divide the limit for the
covered property subject to coinsurance by the result determined in Step 2.
Note: Stop here if the result
is 1.00 or higher because no coinsurance penalty applies. Go to Step 4 only if
the result is less than 1.00.
Step 4. Multiply the total
amount of loss, prior to the application of a deductible, by the percentage
determined in Step 3.
Step 5. Subtract the applicable
deductible from Step 4.
The insurance
company does not pay more than the amount determined in Step 5. or the limit of
insurance, whichever is less. It does not pay any remaining part of the loss.
|
Examples: A fire destroys a shipment that belongs to Maximus Imports. The covered loss amounts to $79,000. Maximus' limit is $750,000 and is subject to a coinsurance clause. Scenario 1: The total property value at the time of loss is $920,000, of which $60,000 is property in transit. The coinsurance percentage is 80%. The calculations to determine if the total limit of insurance is adequate or if a coinsurance penalty applies are as follows: Step 1: Total property value of $920,000 minus the value of property in transit of $60,000 equals $860,000. Step 2: $860,000 multiplied by .80 (for the 80% coinsurance clause) equals $688,000. Because the $750,000 limit is greater than the minimum required limit of $688,000 needed to avoid a coinsurance penalty, this loss is not subject to a coinsurance penalty. Scenario 2: The
total property value at the time of loss is $1,200,000, of which $100,000 is
property in transit. The coinsurance percentage is 90%. The calculations to determine if the total limit of insurance is adequate or if a coinsurance penalty applies are as follows: Step 1: Total property value of $1,200,000 minus the value of property in transit of $100,000 equals $1,100,000. Step 2: $1,100,000 multiplied by .90 (for the 90% coinsurance clause) equals $990,000. Because the $750,000 limit of insurance is less than the minimum $990,000 limit required by applying the coinsurance clause, a coinsurance penalty applies. Step 3: The $750,000 limit of insurance divided by the $990,000 minimum limit of insurance required equals a rounded factor of .758. Step 4: The $79,000 amount of loss multiplied by .758 equals $59,882. $59,882 is paid instead of $79,000 because the limit of insurance is inadequate, and a coinsurance penalty is applied. The coinsurance penalty amounts to the difference between $79,000 and $59,882, or $19,118. |