We have all seen the commercial about the Twix candy bar and the competition between Right Twix and Left Twix.
Both factories are identical and produce the right and left halves of a single product. Yet, there is a sinister difference between the two. In order to save money on Insurance, Right Twix only insures for one half the value that Left Twix does. That’s right, Left Twix insures for 100% of Replacement Cost Value and pays twice the premium that Right Twix does.
Right Twix has determined that with all of the safeguards in place it is very unlikely the whole factory will burn down. Maybe half of it at the most.
It turns out their estimate was correct because when the fire started in one facility and eventually spread to the other, the fire was brought under control with only partial damage to both Right and Left Twix.
Right Twix called their Insurance company to file a claim fully expecting they would pay for all of the damage. Left Twix did the same.
Since Right Twix only insured for half their value and paid half the premium that Left Twix did, does it seem fair to you that Right Twix should receive the same benefit as Left Twix, who paid twice the premium for twice the amount of insurance?
It isn’t fair at all, not to all the business owners who pay their full share of premium or to the insurance companies who collect the premiums of the many to pay the losses of the few.
For this reason, Fire Insurance policies usually contains a premium levelling mechanism referred to as the Co-Insurance Clause. The Insurance Broker for Left Twix took the time to explain this important condition. For a Replacement Cost Policy, Coinsurance is usually set at 90% of the Replacement Value. Failure to do so will result in a penalty if there is a claim, and the following is an example of how it works;
The Twix factories both had Replacement values of $1,000,000.00. The minimum amount required by the Coinsurance Clause is therefore $900,000.00. It is of course best to insure for 100% of Replacement Value, but that is another story.
The formula is best explained as Did, divided by Should, multiplied by the amount of the damage to the factory. In this case each factory had $250,000 in damage.
That means that Right Twix was paid;
DID. SHOULD. DAMAGE. SETTLEMENT
$500,000 \ $900,000 X $250,000 = $138,000 and became a Co-Insurer for the difference of $112,000.00
Left Twix promptly received the full settlement of their claim and was soon back in operation.
Right Twix needed to obtain additional financing to rebuild causing delays in resuming operations and went eventually went out of business leaving Left Twix making both halves of the chocolate bar.
The moral of this story is that the right Insurance Broker will tell you what you need to know, not just what you want to hear, or;
You can’t expect to get both halves of the Twix if you only pay for one.