Coinsurance and Other Insurance on the Same Bakery Building
Riverside Bakery insures its building under a commercial property policy with a $600,000 limit, an 80% coinsurance clause, and a $5,000 deductible. The building's replacement cost at the time of loss is $1,200,000. A fire in April causes $300,000 of damage. Riverside also carries a second, separate policy on the same building from another insurer with a $400,000 limit, no coinsurance clause, a $5,000 deductible, and a pro rata other insurance clause. Investigators trace the fire to a faulty proofing oven installed eighteen months earlier by an unaffiliated equipment contractor; Riverside's construction contract with that contractor contains a waiver of subrogation in the contractor's favor. Riverside is insured on a replacement cost basis under both policies and has not rebuilt.
1. Ignoring the second policy, what would the first insurer pay?
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Apply the coinsurance formula: (insurance carried ÷ insurance required) × loss, then apply the deductible.
- Required: 80% × $1,200,000 = $960,000
- Carried: $600,000 = 62.5% of value - well under the 80% threshold
- (600,000 ÷ 960,000) × $300,000 = $187,500
- Less $5,000 deductible = $182,500
The insured absorbs $117,500 of a $300,000 loss plus the deductible. Note the coinsurance penalty is not the deductible - the deductible is subtracted after the penalty is applied.
2. With both policies in force, how much does Riverside ultimately collect, and is it fully indemnified?
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With two policies on the same property, each pro rata clause makes that insurer liable only for its share by limits, so allocate the loss first.
- Policy A share: 600,000 ÷ 1,000,000 = 60% × $300,000 = $180,000, less $5,000 = $175,000
- Policy B share: 400,000 ÷ 1,000,000 = 40% × $300,000 = $120,000, less $5,000 = $115,000
- Total: $290,000
Check the coinsurance interaction: A's pro rata share of $180,000 is below its coinsurance-adjusted maximum of $187,500, so the coinsurance clause does not reduce it further. Coinsurance bites on a policy's own liability; once the loss is split, the share may fall under the coinsurance ceiling.
Riverside is not fully indemnified - it bears $10,000, equal to the two deductibles. Insurance restores the insured to the pre-loss position less deductibles; it never pays more than the actual loss, however many policies exist, and duplication of coverage is not duplication of recovery.
3. After paying, can the insurers pursue the equipment contractor?
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They have subrogation rights in principle: on paying, the insurer steps into the insured's shoes and may pursue the third party whose negligence caused the loss. Recovery is limited to amounts the insurer actually paid, and the insured retains rights for its deductible and any uninsured portion.
But the construction contract contains a waiver of subrogation in the contractor's favor. A waiver given by the insured before the loss generally bars the insurer's subrogation claim even though the insurer did not consent, and most commercial property forms expressly permit an insured to waive subrogation in writing before a loss without impairing coverage. So coverage stands, but recovery from the contractor fails - and the same waiver likely bars Riverside's own claim for the $10,000 of deductibles.
The judgment tested is causation of the shortfall: the insurers are not being unfair; the insured bargained away the right of recovery. If the insured had wanted both the contractual waiver and insurer consent, it needed an endorsement acknowledging the waiver - and a premium charge for it.