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Jun 29, 2021

It Pays To Be Covered

From homeowner and auto insurance to personal liability insurance, most people are more involved in insurance than they may think. It is not surprising that most people, when purchasing or thinking about insurance, maintain an “it won’t happen to me” mindset that can devastate them in the long run. No one wants to think about the worst-case scenario, for example, a flood in their basement or their business being burnt to the ground, but it does happen, and it can happen to you. 

It Won’t Happen To Me

The “it won’t happen to me” mindset is a form of optimism bias, which is the belief that each of us is more likely to experience good outcomes and less likely to experience bad outcomes. When you have an optimism bias, you will disregard the reality of the overall situation because you think you are excluded from the potential negative effects.1

This optimism bias is one reason why individuals often do not purchase the appropriate amount of coverage and underestimate the likelihood of needing that insurance coverage. Along with a lack of appropriate coverage, individuals purchasing insurance often fail to disclose essential details for the required insurance with the hope of paying lower premiums. Not only is a lack of disclosure considered fraudulent, but it also brings rise to the issue of coinsurance. 

Coinsurance Penalty 

6 old televisions with antennas stacked around each other

Coinsurance is a clause used by insurance companies on policies covering property such as buildings, contents, stock, or industrial equipment. This clause makes sure that policyholders insure their property to an appropriate value and that the insurer receives a fair premium for the risk.2

Here is an example of an application of the coinsurance clause: A company with an inventory of 100 televisions decides to only purchase insurance coverage for 50 of them with the idea that it is unlikely all of the televisions will be damaged at the same time. Their thought is that if they need to make an insurance claim, they will tell the insurance company that it was only the 50 televisions they purchased coverage for that were damaged. 

If there is a flood in the room with the televisions and a representative from the insurance company comes to assess the damage and sees that there are 100 televisions instead of only 50, the company would be subject to a coinsurance penalty and need to pay out of their own pocket for this lack of coverage;

The coinsurance formula is: (Actual Amount of Insurance) x Amount of Loss = Amount of claim (Required Amount of Insurance). 

The effect of the coinsurance clause on a loss leaves the insured with only a fraction of the money needed to repurchase or rebuild the affected item(s). For instance, what happens if a building that is worth $10 million is insured for $5 million and suffers a loss estimated at 3 million? The result is that they are only entitled to $1.5 million and are required to pay out-of-pocket for the remaining balance.


Being underinsured can be a major problem on a commercial claim. The legal implications and potential litigations associated with a lack of coverage can be financially devastating and emotionally overwhelming. Therefore, legally speaking, appropriate coverage is fundamentally compulsory. Although paying the necessary premiums may seem costly and redundant, having that insurance coverage as a protective umbrella is invaluable. Take the time to check your insurance policy, it pays to be covered.

Our team at SV Law is always here to help. Contact us anytime. 




The content of this article is intended to provide a general guide to the subject matter and is not legal advice. Specialist advice should be sought regarding your specific circumstance.