This section is from the book "Practical Real Estate Methods For Broker, Operator & Owner", by Thirty Experts. Also available from Amazon: Practical Real Estate Methods for Broker, Operator, Owner.
In soliciting insurance, the cost of same has, of course, an important bearing, and the argument is often used that the rate can be reduced 10% by the application of the 100% Co-insurance or Average Clause. This, to my mind, is a most dangerous practice, and does not redound to the benefit of the assured in many cases. It gives the companies a decided advantage, as is best proved by the fact that they can afford to reduce the rate of insurance by reason of the application of the clause.
An 80% clause on a $10,000 valuation requires an $8,000 policy, and a 100% clause a $10,000 policy; consequently, while you reduce the rate 10%, you increase the insurance 25%, and the net result is that your protection is actually costing you 123/2% more than with the 80% clause. Of course, you have additional protection if you comply with the conditions of the contract, but at a considerable increase of cost and in only a few cases is it necessary to insure the full value of property because a salvage of at least 20% is the rule and not the exception in cases of loss in this city.
The hardship of a co-insurance clause of either kind can be lessened in cases where buildings are insured, by excluding the cost of foundations and excavations below the level of the ground, so that these items will not be taken into consideration in fixing the original value of the structure, thus limiting the scope of the clause.
It is also permissible to include under the building item (which carries almost invariably a lower rate than the contents) boilers, engines, and main shafting and machinery pertaining to the service of the building or the furnishing of power therein.