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Co-insurance. What happens after the fire is put out?


     A partial loss is likely

Very few fires burn a building to the ground. When a building does not burn to the point where it is turned into a pile of charred rubble, then you, the owner, have suffered what is called a "partial loss".

Whether you know it or not, most owners of properties who suffer a building fire will wish it had burned to the ground. That sounds harsh, but it won’t seem so unrealistic once the term co-insurance is explained.

A "partial-loss" is heaven for your insurance company, as well as the horde of public adjusters who will be knocking on your partially burned front door following your fire.  Some call PA's vultures, but that is grossly unfair.  If you find one who will work hard and go to bat for you, they can save you thousands of dollars over what you pay them. Also, a good PA knows his way around an insurance company better than you do, so depending on the size of loss you have, you should not let the insurance company talk you out of hiring a PA.  On the other hand, you won't ever need one if you insure your home properly.

Insurance companies do not like it when you have any kind of loss, but a "partial loss" can give them breathing room when it comes to settling your claim. Co-insurance is a clause in your insurance agreement that is seldom explained when a new owner, or an experienced one for that matter, is buying insurance for their home, office building, or investment property.

Co-insurance is determined by a ratio between what the appraised cost would be to replace the building, if it burns to the ground, and the amount of fire insurance you were carrying on the property the day of the fire. For instance, if it would have cost, according to the insurance company, 200,000.00 dollars to rebuild your house to the exact specifications of the original structure, and you only carried 100,000.00 dollars worth of insurance on the building, then in essence, you are only entitled to 50% of the cost of the repairs.

Wow! That means, if you have a "partial loss" and the reconstruction estimates are 120,000 dollars, the insurance company is only going to pay you 60,000.00 dollars. You will have to come up with the rest out of your own pocket.

“I never knew that!” shouted the homeowner to his insurance agent.  

Suddenly, out of the woodwork march the public adjusters who tell you they will, for a percentage of the settlement, fight the inflated insurance appraisal and bring the ratio more in line to your benefit.

The cardinal rule? Protect yourself.

There are several types of appraisals. The Real Estate appraisal; done when you want to either sell your house or refinance it.  Another is a tax appraisal; performed when you want to fight your tax assessment, in which case you try to get the lowest appraisal possible. And then there is the most important appraisal of all. Unfortunately, it is the one very few people know about -- the insurance appraisal. The insurance appraisal represents the "real-cost" replacement value of your property.  

If you live in a 150 year old house, the insurance appraisal will represent exactly what the reproduction price would be to build a house exactly the same, right down to the cut nails in the barn wood flooring. The appraiser will calculate the cost using current code, labor, and material prices. The insurance appraisal is the most important appraisal you could ever have done, and it is well worth the money it will cost you.

Not any appraiser can do the job. You should call your insurance agent and request a couple of names of reputable private insurance appraisers. If you have not already done so, hire one immediately. After you get the appraisal, you should call your insurance agent and insure for at least 80% of the amount of that appraisal. Note: The 80/20 co-insurance clause requires the insured  to carry up to 80% of the replacement cost of the structure.  This is where the questionable appraisals come into play after the loss.  Do the appraisal before the loss and then conform to the 80/20 clause in the contract.

The mistakes many people make are two fold. One; they think a fire can’t happen to them. Two; they think if they insure for the balance of their mortgage they are covered; wrong on both counts.  True, there are many people who never suffer a fire. We will call them the lucky ones, because those who have gone through the devastation of a major house fire can tell you the horror of slopping through the pungent muck with a public-adjuster wondering how in God’s name they are going to get through it.

“Co-insurance? I never heard of such a thing.”  Don’t let those be your words.

Lastly, there is confusion when your insurance agent sells you the homeowner’s policy. He or she will tell you that you have replacement insurance should your house burn to the ground; called a "total loss". What they cannot give you is the ratio of what you will receive should you have a "partial loss". And it will seldom be suggested that you have an insurance appraisal done on your property, if for no other reason than for you to gain an awareness of the risk you are taking by deciding to under-insure.

Thank you for reading.

Jeffrey B. Allen

For more information - call your insurance agent.