Coinsurance
A property insurance clause requiring the insured to maintain coverage equal to a specified percentage of the property's value, usually 80, 90, or 100 percent. If coverage is below the requirement, claim payments are reduced proportionally through the coinsurance penalty.
Coinsurance is a property insurance clause that requires the insured to carry coverage at a specified percentage of the property's value. Insureds who carry less than required face a proportional reduction in claim payments, known as the coinsurance penalty.
How the Clause Works
A typical commercial property policy includes an 80 percent coinsurance clause. That means the insured must carry coverage equal to at least 80 percent of the property's replacement cost. If the property is worth $1,000,000 replacement cost, the insured must carry at least $800,000 in coverage. Fall below that and the coinsurance penalty activates on partial losses.
The Penalty Formula
On a partial loss, the carrier pays: (coverage carried divided by coverage required) times (loss amount), minus the deductible. If you carry $600,000 but should carry $800,000, you have 75 percent of the required coverage. On a $100,000 loss, the carrier pays 75 percent, or $75,000, minus the deductible. The insured bears the remaining $25,000 as a penalty for underinsurance.
Why It Matters for Restoration
Contractors working on commercial properties sometimes encounter claims where the ultimate payout is less than the full loss because of a coinsurance penalty. This can delay payment, force change orders, or require the owner to cover gaps out of pocket. Understanding the coinsurance situation before writing a full scope helps set accurate expectations with the property owner about the net coverage available for repairs.
Frequently asked questions
The formula is: (insurance carried divided by insurance required) times the loss, minus the deductible. If you carry $400,000 of coverage on a property that requires $500,000 (80 percent of $625,000 value), you have 80 percent of the required coverage. A $50,000 loss would pay 80 percent of $50,000, minus your deductible.
Coinsurance is a pricing mechanism. Carriers use it to ensure insureds buy enough coverage relative to the property value. Without it, policyholders could buy small policies and still collect on partial losses, which would force carriers to raise premiums for everyone. The clause rewards adequate coverage and penalizes underinsurance.
Insure your property at the coinsurance requirement (usually 80 to 100 percent of replacement cost) based on a current valuation. Review values at each renewal because costs rise. Some policies offer an agreed-value endorsement that waives coinsurance in exchange for a documented property valuation at the start of the policy period.
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