Coinsurance, the 'Written to Value' Promise, and the Silent Utility Endorsement
Sonora Metalworks insures its Phoenix plant and contents on a commercial property form with an 80% coinsurance clause and a $5,000 deductible. At the time of loss the building's replacement cost is $1,200,000; the limit purchased is $720,000. A dust explosion - a covered peril - causes $180,000 of covered damage. Separately, a windstorm knocked out the utility grid for three days and idled the plant; the insured carries no utility services or spoilage endorsement. The CFO insists the carrier must pay the full $180,000 because the agency told him the policy was 'written to value,' and he wants the lost production paid too, since the windstorm itself is a covered peril.
1. Compute the coinsurance penalty and state what the carrier owes on the $180,000 loss.
Read the worked answer
Step 1 - limit required to avoid penalty: 0.80 × $1,200,000 = $960,000.
Step 2 - ratio actually carried: $720,000 ÷ $960,000 = 0.75 (the insured is a 25% coinsurer).
Step 3 - apply the ratio to the loss: $180,000 × 0.75 = $135,000.
Step 4 - subtract the deductible: $135,000 − $5,000 = $130,000.
So the carrier pays $130,000 of a $180,000 loss. The insured absorbs the $45,000 coinsurance penalty plus the $5,000 deductible - $50,000 out of pocket on a loss that sat comfortably under the policy limit. That is the point the CFO is missing: the limit was never exhausted, yet the insured still pays, because coinsurance measures the limit against value, not against the size of the loss. Any loss figure that fits under an inadequate limit can still be penalized.
2. Does the agency's 'written to value' statement obligate the carrier to pay the full loss?
Read the worked answer
No. The policy - including the coinsurance clause - is the entire contract, and the clause is plain: the carrier's liability is reduced when the insured carries less than the required percentage. An agent's oral characterization does not amend a filed form.
Separate the two questions:
- Against the carrier: no coverage. The coinsurance math stands.
- Against the agency: potentially yes. If the insured asked for full replacement-cost limits and the agency represented the program as adequate, the insured may have a professional liability claim for the uninsured $45,000 penalty (and possibly the deductible) if reliance and damages can be shown.
Reformation or estoppel is a much harder road: it generally requires mutual mistake or fraud, not a salesman's shorthand. Advise the client of the coinsurance result in writing, and flag the agency's exposure to its E&O carrier. The exam wants you to keep the coverage answer and the E&O answer in separate boxes.
3. Must the carrier pay the three days of lost production caused by the grid outage?
Read the worked answer
No, on the unendorsed form.
- Business income requires direct physical loss to insured property by a covered cause of loss. The windstorm damaged the utility's lines miles away; nothing at the plant was physically damaged.
- Off-premises utility service failure is excluded unless the insured buys the Utility Services - Time Element endorsement. The peril being 'covered' for direct damage does not transmit coverage through the power line.
- The three-day outage would also be measured against any waiting period in a business income form, but the endorsement question resolves it first.
The fix is underwriting, not argument: add Utility Services - Time Element (and Direct Damage if the insured wants the spoiled-stock and equipment angle), then re-examine whether the coinsurance limit is adequate, since the same valuation gap affects the business income limit.