Wildfires, Depreciation and Coinsurance in Contents Claims

If you don’t understand this part of the insurance contract, it can cost you thousands of dollars at claim time.

In a Homeowner policy, there is not usually a section entitled “Co-insurance.” But the clause is listed in the Section I, Conditions, of the standard Homeowners HO-3 form. It’s also in the Loss Conditions portion of any Business Insurance policy.

Go find your policy and turn to the Conditions section, and read the part labeled “Loss Settlement.” I thought about putting a copy of the section in the book to make it easy for you. But the reason I wrote the book is to shake you up and get you more involved in your own claim. You’re going to get paid hundreds or thousands of dollars more because of the stuff in the book, and you’re not going to give me any of it. So, get busy and read your policy.

Let me at least translate the legalese: The insurance company requires you to carry policy limits on the Dwelling equal to no less than 80% of the full replacement cost of the building (not including foundations or underground pipes, wires or drains). If you do not carry 80% of the full replacement cost, the insurance company will penalize you when you have a claim.

Simple. But dangerous for your cash flow.

If you have a home that has a replacement cost of $100,000, and your policy limit for the Dwelling is $100,000…no penalty! You’re insured 100% to value. You really should be insured 100% to value all the time.

Please remember that being insured to value does NOT mean that you insure your dwelling or building for its market value or sale price. Insure the dwelling or building for the amount of money it will take to rebuild the dwelling or building completely. Don’t include the cost of the land your dwelling or building sits on. Insurance companies don’t insure dirt.

In this example, you could be insured for as low as $80,000, and receive 100% of any claim with no penalty. However, you’d still be technically underinsured. In the case of a large loss, you would not collect all you should to make you whole again.

Insure your property for anything less than the percentage shown in your policy and there could be a coinsurance penalty.

There’s a simple formula to figure co-insurance:

What you DID buy divided by what you SHOULD have bought.

DID x loss minus deductible = claim amount

Here’s a quick example:

The value of the property $150,000
Coinsurance percentage 80%
The limit of insurance is $100,000
The deductible amount is $250
The amount of the loss is $20,000

Step 1: $150,000 x 80% = $120,000 (the minimum amount of insurance to meet your coinsurance requirement)
Step 2: $100,000 (what you did) divided by $120,000 (should have done) = .67, or 67%
Step 3: $20,000 x 67% = $13,400
Step 4: $13,400 – $250 = $13,150

You see? It really is quite simple to figure out.

Sometimes, there is a coinsurance requirement on the Contents portion of the coverage, too. The same rule applies, and the same method of figuring out if there’s a penalty applies.

The BIG problem is that most people don’t figure out that there is a coinsurance problem until AFTER they have a loss of some kind.

There are a few obvious reasons that property is under-insured:

1. When you filled out your insurance application, you used a figure that is too low for replacement cost of your house. This could come from:

A. Ignorance…meaning you don’t really know how much it would actually cost to replace your home.

B. Simply using the same policy limits on your new policy as you had on your old policy.

C. Being too cheap, and buying a policy with lower limits to save premium dollars.

2. Your agent doesn’t know what it would cost to replace your house when he submits the application.
3. The agent was bidding low price to get your business, and made some cuts to get the premium down.

About the only thing that you can do to minimize a coinsurance penalty is to challenge it.

If your adjuster tells you that you will have a coinsurance penalty assessed against your claim, make him provide his calculations of the coinsurance penalty.

The first thing that the adjuster has to do to calculate coinsurance is to calculate the valuation of your property. EVERYTHING ELSE he does is based on that calculation. If it’s too high, your coinsurance penalty will be too high.

He will calculate either the Replacement Cost Valuation (RCV) or he will calculate the Actual Cash Valuation (ACV). The policy will tell him which valuation to use. He doesn’t get to choose on his own. Most Homeowners policies are RCV on the dwelling. Most commercial property is ACV, although an endorsement for RCV is available for a small extra premium.

To calculate the property valuation, the adjuster can use:

1. A Wild A** Guess (often done)

2. His estimating software. Some estimating software has valuation built in, so all he has to do is enter data about the age and condition, the size of the building, the features, etc., and that software will do the work for him.

3. Marshall and Swift (M&S). The absolute standard in the insurance industry for building valuation is a company called Marshall and Swift. All adjusters know about M&S, even if they don’t know how to use their database. (If your adjuster doesn’t know about M&S, or how to use it, get another adjuster FAST.) Even if the adjuster uses M&S, you need to review the data he entered to obtain the valuation. If he entered wrong data, the valuation will be wrong, too. For example, if he used the area of your house at 2,000 square feet, and your house is only 1,600 square feet, the entire valuation will be wrong.

There are a bunch of variables that are entered into a valuation software program that have a DIRECT bearing on your valuation. Things like:




Number of rooms


Finishes and extras

Basement or slab foundation

YOU can now use the Marshall and Swift valuation program, just like an adjuster. They have built a website where any person can go and calculate their own property valuation. They charge about $8-$15 for each valuation. There is a tutorial on the home page of the website, which will tell you exactly how to use the program. It’s super easy and very accurate.

Go to: http://www.swiftestimator.com


Remember, require your adjuster to furnish a copy of his valuation calculations for your property. Compare it with the Marshall and Swift valuation to make sure it’s accurate. If you don’t have the ability to get your own valuation, take the adjuster’s valuation and show it to a real estate broker. Not just an agent, but a broker. The broker will likely be able to look at your property and the valuation, and tell you if it’s accurate.

If you have calculated a lower valuation than the adjuster, insist that he use your valuation for his coinsurance calculations.

If you’re read my book BEFORE you have a claim, call your agent and make sure that you are insured to value.

If you’re read my book AFTER you have a claim, call your agent and ask him why you’re NOT insured to value. If your agent messed up, and you can prove it, you could have grounds to make a claim against the Errors and Omissions Liability coverage of your agent.

If you’re reading this book to figure out how to collect every dollar you’re entitled to collect, then…

FIGHT FOR EVERY PERCENTAGE POINT!! Every percentage point of a coinsurance penalty is worth hundreds or thousands of dollars. Don’t allow yourself to be cheated out of all of the money you are entitled to collect!


2 Responses to Wildfires, Depreciation and Coinsurance in Contents Claims

  1. He11ix says:

    The correct tool from MSB for insurance purposes would be found at http://www.accucoverage.com

  2. L Guy in Phx says:


    It’s rather unfair to the rest of the estimating programs to say that MSB is the final say in all home valuations. Many very large insurance carriers and adjusting firms use other programs to determine this figure. Xact is one very popular program and is on par for determining home (and commercial now with the latest release) valuations. To tell a person to “find another adjuster FAST” if that adjuster doesn’t use MSB is bad advice. I think better advice would be to say – if your adjuster cannot provide you with a professional document that he/she used to determine your home’s valuation, ask for another adjuster that can.

    Your readers will find it helpful to know that lots of insurance carriers and adjusters don’t use your preferred software. I think your readers will also find it helpful to know that MSB doesn’t have the market share that you make it sound like it has. Sometimes, your reader’s adjuster will have to rely on other means to determine the home’s value solely because that is the software package that his/her company has mandated.

    That said, I do agree that your readers should do their work and not just let the adjuster or insurance company determine their home’s value or their claim amount. They should ask questions on how the numbers were determined and how they relate to the final outcome of the claim. Overall, a very good write-up. Nice Job!

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