The facts

XYZ Construction Company had a contractors' equipment insurance policy that included a 100% coinsurance clause. As part of this policy, they had a scheduled piece of equipment, an excavator, which was insured for $80,000.

XYZ Construction Company was contracted to work on a project in another city. In order to complete the project, their excavator was required. However, during transit, an unfortunate collision occurred, causing extensive damage to the excavator and rendering it a total loss. XYZ Construction Company promptly notified their insurer about the incident and provided all the required documentation and evidence of the loss.

The result

After conducting a thorough investigation, it was determined that the excavator had suffered irreparable damage, rendering it a total loss. The total cost to replace the excavator was determined to be $120,000. However, it was discovered that XYZ Construction Company had initially insured the excavator at $80,000 when procuring the contractors' equipment policy.

This situation posed a significant challenge for XYZ Construction Company as it would result in a coinsurance penalty being imposed. The insurance carrier assessed their portion of the loss based on their policy, which amounted to $75,000. Consequently, XYZ Construction Company was responsible for covering the remaining replacement cost of $45,000.

The formula the insurance carrier used to calculate the coinsurance penalty was:

Amount of insurance in place / amount of insurance that should have been in place x the loss, minus the deductible. 

80,000 / 120,000 = 0.66 x $120,000 - $5,000 = $75,000

Risk factors

Risk factor #1

It is crucial to assign an accurate value to scheduled equipment. Had XYZ Construction Company insured the excavator at its true replacement value of $120,000, there would have been no coinsurance penalty, and they would have received the full amount of $120,000 for the loss, minus their deductible.

Risk factor #2

It’s important for policyholders to differentiate replacement cost with market value. The replacement cost is almost always higher than the equipment item’s market value.

_{*The claim scenario is strictly documented for illustrative purposes only and provides an example of what a policy could cover. It is intended to provide a general overview of the program described. Please remember only the insurance policy can give actual terms, coverage, amounts, conditions and exclusions. Program availability and coverage are subject to individual underwriting criteria.}