In the field of commercial property insurance, it is essential to understand how the proportional rule (also known as the co-insurance clause)works. This rule can significantly impact the amount you receive in the event of a loss.
What is the proportional rule?
The proportional rule applies when the declared amount of insurance is less than the actual value of the insured property. In other words, if you underinsure your building, equipment, or inventory, you may not be fully compensated, even in the case of a partial loss.
The proportional rule is a method of calculating the appropriate insurance amount based on the replacement cost of the property. Understanding the risks of underinsurance is critical so you can make informed decisions. In the event of a total loss, the indemnity is limited to the amount insured. It is recommended to choose a coverage amount equal to the property's value or its replacement cost, especially if your policy includes a "replacement cost" clause.
For partial losses, compensation may be reduced proportionally based on the degree of underinsurance. Article 2493 of the Civil Code of Québec provides for a 100% application of the proportional rule. However, your insurance policy might include a different percentage (e.g., 90% or 80%).
To receive full compensation for partial losses, your property must be insured for at least the minimum percentage stated in the proportional rule clause of your contract. If you insure for less than this threshold, you may be required to absorb part of the loss.
Exemples simples
Example | Property Value | Insurance Amount | Co-Insurance Requirement (%) | Required Coverage | Loss Amount | Indemnity Calculation B X (E – Franchise) * | Payable Indemnity |
1 | 600 000 $ | 480 000 $ | 80 % | 480 000 $ | 300 000 $ | 480 000 x (300 000 – 1 000) / 480 000 | 299 000 $ |
2 | 600 000 $ | 400 000 $ | 80 % | 480 000 $ | 300 000 $ | 400 000 x (300 000 – 1 000) / 480 000 | 249 167 $ |
Why does this rule exist?
The goal is to encourage businesses to insure their assets at their true value.
How can you avoid the application of the proportional rule?
- Regularly assess the value of your assets — including buildings, machinery, and inventory.
- Check if your policy includes a replacement cost clause or a tolerance margin, such as 80%, 90%, or 100%, which can limit the effects of the proportional rule.
- Be accurate in your insurance declarations.
Conclusion
The proportional rule is often misunderstood, but it can have a major financial impact on your business in the event of a claim. By insuring your assets properly, you protect your company’s financial health — and avoid unpleasant surprises.
At Gosselin Insurance Brokers, we’re here to help you properly assess your assets and choose coverage tailored to your business needs.
For any questions, do not hesitate to contact our brokers : 1 866 961-3553