Coinsurance
A policy condition requiring the insured to carry coverage equal to a specified percentage of property value or face a proportional penalty at claim time.
What It Is
Coinsurance is a commercial property policy condition that requires the insured to maintain coverage limits equal to at least a specified percentage (typically 80%, 90%, or 100%) of the property's value at the time of loss. If the insured fails to meet this requirement, the coinsurance penalty reduces the claim payment proportionally—even on partial losses.
The coinsurance formula is: (Amount of Insurance Carried / Amount Required) x Loss = Claim Payment (before deductible). If a building worth $1,000,000 has an 80% coinsurance clause but is only insured for $600,000, the coinsurance ratio is $600,000 / $800,000 = 75%. On a $200,000 partial loss, the insurer pays only 75% x $200,000 = $150,000, and the insured absorbs $50,000 as a coinsurance penalty—on top of their deductible.
Coinsurance encourages insureds to carry coverage limits that reflect the true value of their property. Without coinsurance, insureds could intentionally underinsure their property (paying lower premiums) and still receive full payment on partial losses, which would be actuarially unsound for the insurer.
Why It Matters for Brokers
Coinsurance penalties are one of the most common and painful surprises in commercial property claims. Many insureds and even some brokers do not fully understand how coinsurance works until a claim reveals an underinsurance problem. Brokers have a professional obligation to explain coinsurance, verify adequate coverage limits, and recommend alternatives like agreed value or blanket coverage to eliminate or reduce coinsurance risk.
Real-World Example
A building owner insures their $2,000,000 building for $1,200,000 with an 80% coinsurance clause, saving roughly $3,500 in annual premium. A pipe burst causes $400,000 in damage. Required insurance: $2,000,000 x 80% = $1,600,000. Coinsurance ratio: $1,200,000 / $1,600,000 = 75%. Claim payment: 75% x $400,000 = $300,000 minus $5,000 deductible = $295,000. The insured absorbs $100,000 in coinsurance penalty plus the $5,000 deductible. The $3,500 premium savings cost the client $105,000.
Common Mistakes
- 1Not reviewing property values annually to ensure they keep pace with construction cost inflation, causing coinsurance shortfalls even when the policy was adequate at inception.
- 2Assuming the coinsurance penalty only applies to total losses—it applies to every claim, including small partial losses.
- 3Selecting 100% coinsurance for the lowest rate without recognizing that this requires the property to be insured at its full value with zero margin for error.
How brokerageaudit.com Handles This
brokerageaudit.com's Policy Checker performs automatic coinsurance adequacy checks on every commercial property policy. The system compares insured values against estimated property values (using construction cost databases), calculates the coinsurance ratio, and alerts brokers when the ratio falls below the required percentage. The platform also identifies accounts that would benefit from agreed value or blanket coverage to eliminate coinsurance risk.