CO-INSURANCE: What is it?

I’ve worked with dealers who came to me wanting to carry enough insurance to cover only higher valued vehicles.  Some wanted just enough physical damage coverage for any one loss.  Others wanted to cover the furnished autos’ value without scheduling specific cars.  Some needed to satisfy a lien holder, but didn’t want to insure the full inventory.  There are solutions to every one of those goals, but ignoring the coinsurance clause will not do the trick.

Let’s assume a dealer has $100,000 in his-cost inventory.  He feels he can afford the premium for $50,000 in DOL protection and knows he can survive with that amount of coverage in the event of a total loss, i.e. a Hurricane Ike catastrophe.  With that in mind, he purchases $50,000 in insurance peace of mind via a physical damage policy that includes a 100% coinsurance clause and $1,000 per vehicle deductible.  

If he doesn’t have a claim, everything’s great.  He saved some money and had some protection.  But Murphy’s Law and Houston traffic must be considered: his salesman totals a $25,000 vehicle.  Taking for granted that the claim is covered, the physical damage payment will be adjudicated as follows:

                                    Vehicle Value:                                    $ 25,000

                                    Less Deductible:                                  – 1,000

                                    Less Coinsurance Penalty                     -12,500

                                    Amount Eligible for Payment          $ 11,500

In other words, the dealer was insured for fifty percent of any loss, not just a total loss.  If the contract had required ninety-percent, then the dealer would have needed $90,000 in coverage to have the claim considered without coinsurance penalty.    An eighty percent clause would have required $80,000 in coverage for same situation.