Question on Co-Insurance after a total loss

I received the following question from a broker earlier this week. It is a question that I am asked from time to time so I thought I would share my answer with you.

Hello Allan,

Hope this message finds you well.

A quick question if you don’t mind, please.

Under an industry ISR Mark IV wording, would the co-insurance/average clause apply in the event of a total loss?  I understand partial losses and the application, also minor loss < 10% where it may not apply.

There is some conjecture around a total loss situation.

Would be interested in your opinion. No urgency.

Kind Regards Kevin [surname and company withheld]

Hi Kevin

Thanks for your enquiry.

The answer really depends on what is meant by total loss. It is that the loss exceeds the Declared Value or does it mean everything is destroyed.

Assuming the policy has 80% co-insurance, and we are not considering removal of debris or any other benefit, then the full sum insured, in the event of a sum insured policy would be paid out. 

Same occurs with an ISR, the loss would still be tested against the Limit of Liability stated in the schedule.

Where it is a problem, and potential confusion can occur, is when the level of under insurance is greater than the 80%.

I show what I mean below.

Test for Co-Insurance

In this example you can see that the amount payable by the insurer after the test for Co-Insurance is less than the Sum Insured or Declared Value for the asset(s), despite the fact the loss exceeds the Sum Insured or Declared Value.

In summary, even after ‘total loss’ we still carry out the two tests, the test for under insurance and then test against the Sum Insured or the Declared Value.

If we find the claim is reduced, we would look to see if the result is any better for the Insured if they were to claim Indemnity. Sometimes it is, sometimes it is worse, depending on the age and condition of the asset(s).

I hope this explains the calculation process.

Regards

Allan