Key Terms
Some important insurance terms
Although all insurance terms are important and form part of your policy, here are some of the more common ones that are of particular interest and directly affect almost every policy yet we feel are most commonly misunderstood.
Co-insurance
Co-insurance is simply an agreement between the insured and the insurer where the insured agrees to maintain a value of insurance up to a specific percentage of the current value (either Replacement Cost or Actual Cash Value as indicated in the policy). If you do not insure up to this amount, then you are subject to only a partial payment of any acutal loss that may occur. This can be best explained by the example below:
If the actual value to replace your building (Replacement Cost) is $1,000,000 and the policy has a 90% Co-insurance Clause, then you are required to insure the building for at least $900,000.
As long as you insure it for at least this amount ($900,000 or higher), then any partial insured losses will be paid for the full amount of the loss up to the limit of insurance on the policy (pending no other restrictions/limitations under the policy).
Given the same example above but you were to insure it for $450,000, then you are insuring it for 50% of the value required ($450,000/$900,000). In an instance where you have a partial loss of say $200,000, then the insurance company would only pay 50% of this loss or $100,000 ($200,000 x 50%).
Replacement Cost
The cost of replacing, repairing, constructing, or reconstructing (whichever is the least) the property on the same or adjacent site, with property of like kind and quality, and for like occupancy, without deduction for depreciation.
Actual Cash Value
The cost of replacing lost or damaged property with similar property of like kind, capacity, size, quality and function, less depreciation.
