Coinsurance, a Sworn Statement of Values, and 'Making the Numbers Work'
A Lewiston commercial building is insured for $1.2 million under a policy with an 80% coinsurance clause and a $10,000 deductible. At the time of a March fire, the building's actual replacement cost is $2.0 million. The fire causes $400,000 in covered damage. The owner's public adjuster tells him to submit a sworn statement of values showing $1.5 million, arguing that the lower value will "reduce the coinsurance penalty," and to move $60,000 of business personal property into the building limit because "the adjuster will never check." The insured asks the public adjuster to prepare the statement and to "make the numbers work." The insurer has requested the statement of values and a sworn proof of loss.
1. Calculate the correct coinsurance payment before any other adjustments.
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Under an 80% coinsurance clause, the required amount of insurance is 80% of the replacement cost at the time of loss: 0.80 × $2,000,000 = $1,600,000. The insured carried $1,200,000, so the coinsurance ratio is $1,200,000 ÷ $1,600,000 = 0.75. The covered loss is $400,000. Applying the ratio gives $400,000 × 0.75 = $300,000. Then subtract the $10,000 deductible, leaving $290,000. Some adjusters apply the ratio after the deductible, which would produce ($400,000 − $10,000) × 0.75 = $292,500. The difference is $2,500 and depends on policy wording, so the adjuster should quote the exact policy formula. What is not debatable is that the insured is significantly underinsured. The public adjuster should explain the penalty rather than hide it.
2. Why is submitting a $1.5 million statement of values improper?
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It is insurance fraud and a breach of the public adjuster's duty of honesty. The statement of values is a sworn document material to the coinsurance calculation. Reporting $1.5 million when the known replacement cost is $2.0 million would artificially reduce the required insurance to $1.2 million and eliminate the penalty. Moving $60,000 of business personal property into the building limit would likewise misclassify property and distort both coverage and premium. The adjuster's suggestion to 'make the numbers work' is not advocacy; it is a request to knowingly submit false information to an insurer. For a licensed public adjuster, this can lead to license suspension or revocation, civil liability, and potential criminal exposure. The correct response is to refuse, document the refusal, and advise the insured to file accurate values and proof of loss.
3. How should the adjuster handle the insured's request while still advocating for the claim?
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The adjuster should put the refusal in writing and explain the real options. First, verify the replacement cost with a contractor's estimate and the insurer's valuation; if $2.0 million is overstated, the corrected figure may reduce the penalty legitimately. Second, confirm whether the policy has a reporting form, agreed value, or margin clause that changes the calculation. Third, identify other covered damages, such as debris removal, business income, or code upgrades, that are separate from the coinsurance penalty. Fourth, discuss whether the insured wants to pursue an appraisal on valuation if the parties genuinely disagree on replacement cost. The adjuster should not sign or prepare a false sworn statement, and should not let the insured sign one without correction. Advocacy means finding legitimate coverage and accurate valuation, not manipulating the coinsurance formula.