Blanket Limit Does Not Erase Coinsurance
Riverside Storage LLC insures two warehouse buildings at a single location under the Building and Personal Property Coverage Form. The declarations show one blanket Limit of Insurance of $2,400,000 covering both buildings, a 90% coinsurance percentage, replacement cost valuation, Special Form causes of loss, and a $10,000 deductible per occurrence. At the time of the March loss, the replacement cost of Building A is $2,000,000 and Building B is $1,000,000. A windstorm peels back a section of Building A's roof; rain enters for several hours and damages racking, drywall, electrical panels, and a forklift the insured leases from a dealer. The adjuster's replacement cost estimate for the damaged property is $600,000. The controller argues that the claim should be paid in full because the blanket limit is larger than the value of either building taken alone, and because a blanket policy 'spreads' the insurance so that no single building can be underinsured.
1. Calculate the maximum amount the insurer will pay for the $600,000 loss and show each step of the calculation.
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Step 1 - Coinsurance base. Coinsurance is tested against all property insured under the blanket, so the base is total replacement cost at the time of loss: $2,000,000 + $1,000,000 = $3,000,000. Required amount carried = 90% x $3,000,000 = $2,700,000.
Step 2 - Ratio. $2,400,000 carried / $2,700,000 required = 0.8889.
Step 3 - Apply to the loss. 0.8889 x $600,000 = $533,333.
Step 4 - Deductible. $533,333 - $10,000 = $523,333.
Step 5 - Limit check. The adjusted amount is far below the $2,400,000 blanket limit, so the limit does not further reduce the payment.
The controller is wrong on both points. A blanket limit spreads insurance across the covered property, but it does not waive coinsurance; the insured still must carry the selected percentage of total value. The $300,000 shortfall behaves like a permanent 11.1% self-insured retention that stacks on top of the deductible on every claim, no matter how small the individual loss.
2. The insured asks whether it can rebuild across town on a cheaper site and still collect full replacement cost for the building. Advise.
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Replacement cost settlement under the Building and Personal Property Coverage Form depends on repairing or replacing the damaged property on the same premises, with reasonable speed and materials of like kind and quality, and the insured must actually complete the replacement (the form allows up to two years after the loss). If the warehouses are rebuilt at a different site, the building loss settles on an actual cash value basis - replacement cost less depreciation - rather than on the $600,000 replacement estimate.
Two consequences follow. First, the ACV figure will be well below $600,000 for the roof membrane and interior finishes, so the insured forfeits the depreciation holdback it would otherwise recover. Second, an ACV settlement does not escape the coinsurance penalty in this edition of the form: the test is still measured against replacement cost when the replacement cost option was selected.
If relocation is a real possibility, the insured should negotiate a valuation approach for a new premises with the underwriter before the loss, or confirm in writing how the carrier will treat a rebuild elsewhere. Assuming the blanket limit 'travels with the business' is a costly assumption.
3. What would the payment have been if the declarations had shown an Agreed Value option instead of a coinsurance percentage, and what conditions attach to that option?
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Agreed Value removes the coinsurance condition. The insurer and insured agree in advance that the limit carried equals the value of the property, so there is no ratio and no penalty: $600,000 - $10,000 deductible = $590,000, subject to the limit being adequate for the loss.
Two conditions matter in practice. First, Agreed Value is not permanent. The form requires a signed statement of values at inception and at each annual renewal; if the statement is not submitted, the Agreed Value provision is suspended and coinsurance applies to the next loss - the trap that catches insureds who change program administrators. Second, the agreed limit is still a cap. If the limit were $2,400,000 and a $2,900,000 loss occurred, payment would be limited to $2,400,000 less the deductible.
For a two-building schedule with values that move with construction costs, the trade-off is straightforward: Agreed Value buys certainty but requires disciplined annual reporting; coinsurance is cheaper but penalizes any shortfall proportionally on every loss.