Explain the Reason for
Coinsurance to Your Insureds—Archived Article

December, 2001

Using This Example Will Make It Easy

Summary: It is often difficult to explain to your insureds the rationale behind the use of a coinsurance clause in a commercial property or inland marine insurance policy. The noninsurance person has a hard enough time understanding the mechanics of the coinsurance clause, let alone appreciating the need for the clause in the first place.

The scenario presented below was first published in the National Underwriter weekly magazine in October 1995. It sets forth in a simple way the reasons the insurance industry created the coinsurance requirement in the beginning of insurance time.

The typical insured does not like to be forced into buying more insurance than he or she thinks necessary. This presentation will help them understand the need for the gentle coercion found in the coinsurance clause.

A Sales Call

You are sitting in a prospective insured's office presenting a property and casualty quote to the president of the company. It is a nice little piece of business, generating about $25,000 in total annual premium. Everything goes smoothly until you get to the property section.

Your prospect's current insurance program shows the building and its contents covered on a specific basis with separate limits and an 80 percent coinsurance clause. You are recommending blanket coverage, with a 90 percent coinsurance requirement.

You have no trouble recounting the benefits of blanket coverage compared to separate limits for the building and personal property. The prospect, however, insists on knowing why she must increase her coinsurance percentage from 80 to 90 percent. You discover that she does not want to hear the explanation that the commercial lines manual requires 90 percent coinsurance for blanket coverage.

Her question is deeper. She wants to know why there has to be a coinsurance requirement in the first place. Why can she not insure her building and its contents for whatever value she chooses without worrying about a coinsurance penalty?

Warming to the subject, she says that having a coinsurance requirement in the insurance policy is as bad as being subjected to government meddling in her private business affairs. The government tries to tell her what is good for her, as if she could not figure it out for herself. She goes on to say that Congress is making progress in getting the feds out of her hair. When that is finished, she vows, insurance companies will be next.

Other than agreeing with her that insurance companies ought to be put in their place and that you are a victim of the system just as she is (which a good salesperson might do), how would you explain the rationale for the coinsurance clause so that your hard-headed prospect will accept the concept of coinsurance as good business sense?

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