9
STAR* TECH JOURNAL/ JANUARY 1984
WATCH OUT
FOR THE CO-INSURANCE CLAUSE!
By Joseph Arkin, CPA, MBA
"You mean I'm only going to collect a little over $12 ,5 00? Wasn't my fire loss more than twice
that amount?" fumed Richard Jenkins, looking at the gutted remains of his arcade.
Jenkins was referring to the offer by his insurance carrier to pay for the damages to the
equipment and fixtures destroyed in the fire. He raged and ranted at his insurance broker and
accused insurance companies of only wanting to collect premiums and not wanting to pay for
losses.
Actually the fire insurance policy that he had bought was one similar to that issued by
almost every fire underwriter in his state. It contained a rate-reduction paragraph in exchange
for his getting a lower rate and carrying insurance for only a specified portion of the fixtures'
and equipment's current value.
Of course Jenkins got a bargain rate when he accepted this clause, but he become a co-
insurer.
Here is a specific example to illustrate the point Suppose you equip your establishment
( exclusive of inventory) for $20,000. That would be its present reasonable valuation. If you
insure for $16,000 and pay premiums on only that amount, you save the premiums on $4,000
and pay less on the $16,000 too.
But you won't be able to collect $20,000 in the event that your premises and its contents are
totally destroyed by fire. You have a guarantee though, that the insurance company will pay in
full for any losses up to $16,000.
Basically you have agreed by acceptance of the co-insurance clause that you will stand
some of the risk of loss and you have let the company reduce its liability for loss to the
proportion of the loss that the amount of insurance bears to the sound value of the property at
the date of loss.
However, the greatest danger for those accepting policies containing co-insurance clauses
is the fact that inflation has greatly increased the replacement value of tangible property. Yet
most businessmen ignore this factor and continue to insure their property at renewal time for
the amount of coverage as shown in the previous policy.
Getting back to Jenkins. This is the trap he made for himself. At the time of setting up his
establishment he paid $15,000 for fixtures and equipment. He took out a policy for $14,000
which was more than 80% of the cost. So far, so good. Thereafter he made periodic additional
purchases of equipment which cost$ I 0,000 without increasing the coverage under the policy,
on the theory that the original equipment was older and that it had depreciated in value.
What he overlooked was the great bogey of inflation caused by two wars, an assortment of
crises, the high cost of Viet Nam, and an endless cycle of wage and price increases. The present
purchasing power of the dollar has been radically reduced with respect to that of the 19 3 9-40
dollar.
At the time of the fire it was determined that the current value of the fixtures and equipment
was $35,000. This is how the company computed the loss payable under the terms of the
policy.
Amount of insurance carried
Amount required to be carried
$14,000
$ 28 ,000*
x Loss = Amountofinsurancerecoverylimited
to amount of insurance carried.
or
X
$25 ,000
$12,500.
*80% of $35,000.
Unfortunately this wasn't the full extent of the loss suffered by Jenkins. He had a similar
clause in the coverage for merchandise.
This situation happens often despite the fact that many banks and insurance companies
take advertisements in nationwide publications, and send periodic notices in their mailings,
warning the business community to re-examine present coverage in view of the greatly
accelerated values of past purchases.
Many times individuals will suspect that their brokers are trying to oversell when they
suggest that present coverage be increased, so as to conform to the 80% co-insurance clause.
In the illustration the figure of 80% was used, but as a matter of fact, the percentage may vary
from state to state or from one insurance carrier to another.
You may consider co-insurance a bargain - it really is - but you must be sure that you are
insured for at least 80% of your cu"ent valuation of fixtures, equipment and inventory.
Now is the time to review your coverage with your broker and accountant to ascertain if
you are adequately insured.
000
MURPHY'S LAW #511
It is impossible to make anything foolproof
because fools are so ingenious.
PRICE
CONVERSION
BREAKTHROUGH!
FOR ROWE
CIGARETTE
MACHINES
• Will vend up to $1 .7 5 in
increments of 5¢.
• Same mechanical
dependability using your
present totalizer. No
electronic components.
• Accepts any combination of
nickels, dimes and quarters.
• 4-minute installation on
location OR
• Send us your totalizer - we
will convert it ($5.00 service
charge).
PRICE
REDUCED
$29. 95 (In Lots of 10)
1 to 9 Units - $34 .95 each
All orders shipped UPS/COD.
TELEPHONE:
516-928-6868
COIN UP-DATE
INDUSTRIES, INC.
14 Hulse Road
E. Setauket, NY 11733