Does Coinsurance Apply to Actual Cash Value (ACV)?

Coinsurance is a common provision in commercial property insurance policies that requires the insured to carry a certain amount of coverage relative to the total value of their insured property. If the insured’s coverage limit falls short of the required coinsurance percentage, claims payments can be reduced. But does the coinsurance penalty apply when claims are settled on an Actual Cash Value (ACV) basis versus Replacement Cost Value (RCV)?

Understanding the complex relationship between coinsurance, ACV, and RCV is crucial for ensuring adequate coverage and maximizing claims recovery.

What is Coinsurance?

Coinsurance provisions are included in most commercial property policies to encourage insureds to properly insure their full property values. Common coinsurance percentages are 80%, 90%, or 100%.

Here’s a simple example:

  • A business has $1 million in insured property.

  • Their policy has a 90% coinsurance clause.

  • So they must carry at least $900,000 in coverage to avoid a coinsurance penalty.

If the coverage limit falls below the required coinsurance percentage of value, claim payments are reduced proportionally. This prevents insureds from underinsuring properties and relying on insurance to make up the difference.

ACV vs RCV Claims Basis

Insurance polices can settle covered losses on an ACV or RCV basis:

  • Actual Cash Value (ACV) – The current value of the damaged property accounting for depreciation and age. This is the basic settlement option.

  • Replacement Cost Value (RCV) – The full cost to replace damaged property with new materials, without deducting for depreciation. This option costs more but offers greater coverage.

Many policies provide ACV coverage automatically but require added endorsements or riders to enable RCV settlements.

How Coinsurance Applies to Different Claims Basis

Whether the coinsurance percentage applies to ACV or RCV depends primarily on two factors:

  1. How the policy defines “value” – In the coinsurance clause, does value mean ACV or RCV?

  2. The type of claim filed – Is the insured seeking ACV or RCV claim settlement?

There are several potential outcomes:

  • If the policy defines value as RCV and the claim is filed on an RCV basis, the coinsurance percentage clearly applies to the RCV amounts.

  • If the policy defines value as ACV and the claim is filed on an ACV basis, the coinsurance applies to ACV amounts.

  • However, if RCV claims basis was purchased, some insurers may still try to apply coinsurance to the full RCV values.

  • When in doubt, the type of claim filed takes precedence. Insurers cannot penalize insureds for purchasing RCV coverage then filing ACV claims.

  • Bottom line – coinsurance should match the claim basis.

Coinsurance Penalties on ACV Claims

Filing claims on an ACV rather than RCV basis can help avoid or reduce coinsurance penalties in certain situations:

  • When the insured property’s RCV has increased substantially but policy limits have not kept pace.

  • If the coinsurance requirement is based on RCV but the policy provides for ACV loss settlements.

  • When damage is extensive and the gap between ACV and RCV of the loss is significant.

  • For older properties where the current ACV is much lower than the RCV.

The key is understanding how the specific policy applies coinsurance to prevent unnecessary penalties that could result in significant underpayment of claims.

Avoiding RCV Coinsurance Pitfalls

Purchasing RCV coverage does not automatically mean coinsurance will apply to RCV. Policyholders can take proactive steps to prevent problems:

  • Review policy terms carefully – Don’t assume coinsurance basis matches claim basis.

  • Adjust coverage limits as property values increase over time.

  • If limits cannot be increased, file claims on ACV basis when allowable.

  • Use professional appraisals to support property valuations.

  • Question any coinsurance calculations based on RCV when only ACV settlements are owed.

For older properties with high replacement costs, ACV claims may produce better results even with RCV coverage purchased.

Coinsurance and Claim Denials

Another issue to watch out for is improper application of the coinsurance penalty:

  • Insurers may try to use coinsurance non-compliance to completely deny a claim. But coinsurance only allows reducing a claim, not rejecting it.

  • Make sure adjusters calculate the penalty properly based on the defined property value and required coinsurance percentage.

  • Don’t let insurers change the coverage value retroactively when determining the coinsurance ratio.

The policyholder’s burden is maintaining adequate coverage limits. Insurers cannot rewrite policy terms after a loss just to impose a larger coinsurance penalty.

Key Takeaways

Remember these tips when it comes to coinsurance provisions and claim filing basis:

  • Coinsurance applies to the value defined in the policy – ACV or RCV.

  • The type of claim filed – ACV or RCV – takes precedence.

  • Filing ACV claims can prevent coinsurance penalties when values have increased.

  • Review policies carefully and adjust limits to match increasing property values.

  • Don’t assume purchasing RCV coverage means the insurer can impose penalties based on RCV.

  • Watch for improper coinsurance calculations and denial of claims due to coinsurance non-compliance.

Applying coinsurance appropriately based on policy language and claims basis filed is crucial for proper claim settlement. Understanding these technicalities prevents coverage gaps and maximizes recovery.

How does a coinsurance work with a health insurance policy?


Is the coinsurance formula applied to total loss?

Coinsurance as it applies to Property Insurance. Because most property losses are partial and not total losses, the average insured will take advantage of this tendency and only insure enough to cover a partial loss.

Is there coinsurance with agreed value?

There are two other methods of property valuation: agreed value and replacement cost. Agreed value waives any coinsurance penalty and pays 100% of the stated amount (agreed upon amount) for any covered loss.

What is coinsurance applied to?

Coinsurance is the amount an insured must pay against a health insurance claim after their deductible is satisfied. Coinsurance also applies to the level of property insurance that an owner must buy on a structure for the coverage of claims.

What does ACV insurance cover?

Actual cash value (ACV) is the amount to replace your damaged or stolen property, minus depreciation at the time of the loss.

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