When reviewing commercial property insurance, you may come across a provision called coinsurance. While the term can sound complicated, its basic purpose is straightforward: coinsurance establishes a minimum amount of insurance you are expected to carry relative to the value of your property.
If you insure property for less than the amount required by the coinsurance provision, you may be responsible for a portion of a covered loss. This can reduce the amount your insurance policy pays when you have a claim.
Understanding how coinsurance works can help you make more informed decisions about property values, coverage limits and the amount of financial risk your business is willing to retain.
How Does a Coinsurance Clause Work?
A coinsurance clause generally specifies the percentage of a property’s value that must be insured. Common percentages include 80%, 90% or 100%.
For example, suppose a building has a replacement cost value of $2 million and the policy has an 80% coinsurance requirement.
The minimum amount of insurance would be:
$2 million × 80% = $1.6 million
In this example, the business would generally need at least $1.6 million in building coverage to satisfy the 80% coinsurance requirement.
The applicable valuation and coinsurance provisions will depend on the policy. That’s why it’s important to understand how your insurer determines the value of covered property and how the coinsurance requirement applies.
What Happens If You Don’t Carry Enough Coverage?
If the amount of insurance you carry is below the amount required by the coinsurance clause, you may face a coinsurance penalty following a covered loss.
The penalty is generally based on the proportion of insurance you carried compared with the amount you were required to carry.
For example:
- Property value: $2 million
- Coinsurance requirement: 80%
- Required insurance: $1.6 million
- Insurance actually carried: $1.2 million
- Covered loss: $400,000
Because the business carried less insurance than required under the coinsurance provision, the insurer may reduce the claim payment based on the applicable coinsurance formula. The policy’s deductible would then also apply.
The exact calculation can vary depending on the policy language, valuation method and other provisions. The important takeaway is that carrying a policy limit that appears sufficient may not be enough if the policy’s coinsurance requirement is not satisfied.
Why Property Valuation Matters
Accurately determining the value of your property is an important part of managing coinsurance risk.
Construction costs, labor rates, materials and other expenses can change over time. If property values increase but insurance limits aren’t updated accordingly, a business could unintentionally become underinsured.
Property valuation should account for more than what a building originally cost to purchase. Depending on the policy and type of property, coverage may be based on replacement cost, actual cash value or another valuation method.
Businesses should periodically review property values and coverage limits, particularly after:
- Renovations or improvements
- Purchasing additional property or equipment
- Changes in construction costs
- Expanding operations
- Significant changes in inventory
- Acquiring new business locations
Keeping property values current can help reduce the possibility of an unexpected coverage issue following a loss.
How Does the Deductible Factor In?
The deductible is another important part of understanding what your business may pay following a covered property loss.
A deductible is the amount your business is responsible for before the insurance policy responds to a covered loss.
For example, if your policy has a $5,000 deductible and you experience a covered $100,000 loss, the policy may respond to the remaining $95,000, subject to the policy’s terms, limits and other applicable provisions.
A coinsurance penalty and deductible are separate considerations. If the policy’s coinsurance requirement is not met, the claim may first be subject to the applicable coinsurance calculation, followed by the deductible.
Because these provisions can interact, reviewing your policy before a loss occurs is preferable to trying to determine their impact after a claim.
Can You Waive the Coinsurance Requirement?
Depending on the type of property policy and coverage available, a waiver of coinsurance may be an option.
A coinsurance waiver can remove or modify the coinsurance requirement when certain conditions are met. In exchange, the policy may have a higher premium or other requirements.
Another option available on some policies is agreed value coverage. Under anagreed value provision, the insurer and policyholder agree on the value of the covered property in advance, subject to the policy’s terms and conditions.
Not every policy or property will qualify for these options, so it’s important to review the available choices based on your organization’s specific circumstances.
Finding the Right Balance of Coverage
Choosing property coverage isn’t simply about selecting the lowest premium or the highest possible limit. It’s about understanding the potential financial consequences of different coverage levels and determining how much risk your organization is comfortable retaining.
When reviewing your commercial property insurance, consider:
- The current replacement cost or other applicable value of your property
- The coinsurance percentage included in your policy
- Your property insurance limit
- Your deductible
- Whether a coinsurance waiver or agreed value provision is available
- Changes to your buildings, equipment or inventory
- How much financial risk your organization could reasonably absorb following a loss
At Bender Insurance Solutions, we help businesses review their property coverage and better understand how provisions such as coinsurance, deductibles and policy limits can affect a claim.
Your insurance program should reflect your organization’s property values and risk tolerance—not simply the numbers used when the policy was originally written. Regularly reviewing those details can help you identify potential coverage gaps and make informed decisions about your risk management strategy.
This article is intended for informational purposes only and should not be interpreted as insurance, legal, or risk management advice.
