Coinsurance is a property insurance condition that requires you to insure your property for at least a stated percentage of its value, usually 80% or more. Carry less than that amount and the policy pays only a proportional share of any loss, a reduction known as the coinsurance penalty.
You will find the percentage printed next to each coverage on your policy declarations. It sits there quietly until a partial loss, which is exactly when it does its damage.
Coinsurance
A policy condition requiring the insured to carry a limit of insurance equal to at least a specified percentage of the property's value at the time of loss, with recoveries reduced proportionally when the limit falls short.
How does the coinsurance penalty formula work?
The formula is amount carried divided by amount required, multiplied by the loss. Adjusters call it Did over Should times Loss. The amount required is the value of the covered property at the time of the loss, using the valuation your policy applies, whether actual cash value or replacement cost, multiplied by the coinsurance percentage on the declarations.
Say a building is worth $250,000 when it burns and the clause reads 80%. You needed a limit of at least $200,000. Carry that or more and the penalty never applies. Carry less and every claim, even a small one, gets cut by the same fraction you were short. The deductible then comes off after the penalty.
Why does the penalty catch so many businesses?
Because the required amount is measured at the time of the loss, not when the policy was written. Construction costs rise mid term, and a limit that satisfied the clause in January can fail it by November. Verisk reported in 2020 that as many as 75% of commercial buildings are underinsured.
The practical defenses on the Building and Personal Property Coverage Form CP 00 10: set limits from projected values twelve months out, add an Inflation Guard percentage on the declarations, or activate the Agreed Value option, which suspends the coinsurance condition entirely. Agreed Value carries an expiration date of no more than twelve months, and coinsurance snaps back the day it lapses, so calendar the renewal.
Frequently asked questions
Is this the same as coinsurance in health insurance?
No. Health insurance coinsurance is your fixed share of every medical bill, like 20% after the deductible. Property coinsurance is a penalty that applies only when you insured the property for less than the required percentage of its value.
What does 80% coinsurance mean?
It means your limit of insurance must equal at least 80% of the property's value at the time of loss. Meet that threshold and the insurer pays covered losses in full up to the limit. Fall short and payments shrink proportionally.
Does the coinsurance penalty apply to total losses?
It bites hardest on partial losses. In a total loss you collect your full limit either way, but that limit was too low to rebuild, which is its own penalty. Partial losses get reduced by the Did over Should fraction.
How do I avoid a coinsurance penalty?
Insure to full projected value, not last year's number. Ask your broker about Inflation Guard and the Agreed Value option on CP 00 10, which suspends coinsurance for up to twelve months when the insurer accepts your statement of values.
This definition is for educational purposes. Your policy's specific terms, conditions, and endorsements control. Talk to a licensed broker about your actual exposures.