As a rental property owner, you are already very busy taking care of your building’s management and tenants. Our insurance brokers can counsel you on insurance matters and help you to develop risk management strategies.
Their help can spare you a lot of worries and give you more time to take care of your income property.
What is the proportional rule?
In real estate insurance, the proportional rule allows to calculate the building’s full replacement cost of which you are legally obligated to cover between 80% and 90%. Most insurers apply this formula, which is usually set between 80% and 100%. It is your responsibility to have the building professionally appraised and to make sure that your insurance coverage is adequate. If are not adequately insured and your building is, for example, razed by fire, you will have to bear sole responsibility for this loss. However, if the building is only partially destroyed, your insurer will apply the proportional rule and you will become a co-insurer along with the insurance company. Call one of our brokers to obtain all of the necessary information on the proportional rule’s application and be well prepared to make an informed decision.
- residential income property
- commercial income property
- property portfolio
- co-housing syndicate
How does the proportional rule apply?
Let’s say that your building has been insured for $500,000, that your replacement cost is $1,000,000, and that your contract’s proportional rule is 90%. A fire has partially destroyed the building and the loss is evaluated at $300,000. Here is how the insurer will calculate your compensation:
Current amount insured
Proportional rule applied to loss X full replacement cost reconstruction
_______________________________________ X $300, 000
90% X $1,000,000 = $900,000 = $166,667
In this example, your compensation would amount to $166,667, which means that you would have to pay $133 333 out of pocket. As you can see, the proportional rule can be very financially damaging and may hinder future projects. We think, however, that such a complicated equation cannot adequately be explained on the Internet and that a meeting with an insurance broker is necessary to fully understand the ins and outs of the proportional rule.