It's important to establish accurate property values and buy adequate insurance. Most off-the-shelf insurance policies have a coinsurance clause requiring the policyholder to insure property to its full value or an acceptable percentage—perhaps 80 or 90 percent—or to bear a financial penalty in case of loss to an underinsured property. For example:
- A church holds a $300,000 insurance policy for a building that has a replacement cost of $500,000.
- The policy requires 80 percent coverage ($400,000) and has a $1,000 deductible.
- The church makes an $8,000 claim for interior water damage.
Because the organization only bought 75 percent of the coverage required by the policy, the policyholder recovers only 75 percent of its water damage claim, or $6,000. After the deductible, the net recovery is $5,000.
Assuming credible property values, an insurer will often consent to an agreed amount endorsement, in which both parties accept the reported values as appropriate, and the coinsurance clause is waived. This endorsement should be requested whenever possible.