Restaurant Insurance Programs – Watch Out For That Coinsurance Clause

Restaurant owners are busy individuals with little time to delve into the details of their restaurant insurance policy.  So it’s little surprise that few of them understand the coinsurance clause on their policy.  And often, those that are aware of it may not correctly understand how it is applied in the event of a loss.  All of this can lead to the restaurant owner spending more out of pocket funds after a large loss than he or she expected.  Talk about a cash flow killer.

First of all it is helpful to understand that not every restaurant insurance program will even have a coinsurance clause built in to the policy language.  If your restaurant insurance is written on the business owners policy form, then you will more than likely not have any coinsurance clause to deal with.  But if you are in an older building, or if you have high liquor receipts or have had past losses or are insured with a company that doesn’t specialize in restaurants, then your property insurance for your building and your contents might be written on the commercial package policy.  If that is the case, then you will likely have a coinsurance clause embedded in your policy language.

So what is this coinsurance clause exactly?  Well, it is a clause in the policy that helps force the policy holder to purchase enough insurance to cover a total loss of the property.  Since most losses are partial losses, some crafty restaurant owners would attempt to purchase only enough insurance to cover the partial loss and not a total loss.  If everyone were able to do this, then insurance rates would be much higher than they are now.

Here’s how a coinsurance clause works.  Let’s assume that you have replacement cost coverage on your building and contents and you are in a building worth $1,000,000 and have contents valued at a replacement cost value of $300,000.  If your policy has an 80% coinsurance clause, then to avoid the coinsurance penalty at the time of a loss, you need to carry a building limit if at least 80% of the replacement value of the building or in this case $800,000.  Likewise, you must purchase a contents coverage limit of at least 80% of $300,000 or $240,000.  As long as you do so, then you face no coinsurance penalty in the event of a loss.

Now let’s see just how the coinsurance penalty would work if you were not in compliance with your policy’s coinsurance clause.  Taking the above example, let’s assume that you only purchased $600,000 of building coverage and $100,000 of contents coverage.  And now let’s assume you have a small fire loss and the damage to your building is $10,000 and your contents loss is $5000.  Here’s where some restaurant owners who are aware of the coinsurance clause don’t have a clear understanding of how the coinsurance penalty works.  Many think that if you don’t carry the 80% required by the clause, then the insurance company will only pay 80% of the loss.  But the reality is more brutal than that.  You see, the insurance company will only pay the percentage of your loss that is in ratio to the percentage of coverage that you carried.   Let’s crunch the numbers.  In this example you purchased $600,000 of building coverage when you should have purchased $800,000.  If we take a ratio of these two numbers then we divide 800,000 by 600,000.  The result is 6/8ths or 75%.  So you purchased 75% of the amount of insurance you should have purchased so you will only be paid 75% of the claim.  If we ignore the deductible in this example then you would only be paid $7500 for the $10,000 damage to your building.  Just think if the loss had been $100,000.  Now you are out $25,000 on the claim.  That’s going to kill your savings and your cash flow.  In the case of your contents coverage, your ratio of what you purchased to what you should have purchased is 100,000 divided by 240,000 or 41.6%.  Multiply that by the loss of $5000 to the contents and you see that the company is only going to pay for $2083 of that $5000 loss.

It’s clear from these notes that restaurant owners need to be very aware of any coinsurance requirements that are on their restaurant insurance policies as ignorance could lead to a financial disaster after a large loss.  At Clinard Insurance Group in Winston Salem, NC, insuring restaurants all across NC and SC is our specialty.    We have designed specialty Restaurant Insurance Programs for many different types of restaurants so that you don’t find yourself as a square peg jammed into a round hole.  We have created specialized programs for  Fine Dining Insurance, Casual Dining Insurance, Fast Food Insurance, and Bar & Grill Insurance as well as Catering insurance so  we can help you with your restaurant insurance no matter what type of restaurant you own.  If you would like help with your restaurant insurance issues, or if you would like a quote on your current restaurant insurance, please call us toll free at 877-687-7557, or visit us on the web at

The source information for this blog can be found at  The Restaurant Answer Guy blog site.

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