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Unpacking Coinsurance in Commercial Property Insurance

February 18, 2025

Coins and Finance

When it comes to insuring your commercial property, it is important to fully understand coinsurance in theory and application. Unfortunately, failure to do so or comply with coinsurance requirements can result in financial penalties, leaving you underinsured when you need coverage the most. The following is a breakdown of what coinsurance is and how it has the potential to impact your business.

What Is Coinsurance for Commercial Property Insurance?

Coinsurance is a clause in some commercial property insurance policies that require an insured to carry coverage for a specified percentage of their property’s total value—typically 80%, 90%, or even 100%. If, during a claim, you fail to meet this percentage requirement, your insurance carrier may impose a penalty, reducing your claim payout in the event of a loss.

How Does Coinsurance Work?

Consider these examples:

  • Your office building is valued at $1,000,000.
  • Your policy has an 80% coinsurance requirement.
  • Meaning you should carry at least $800,000 in coverage to avoid penalties.

Scenario 1: Properly Insured

  • Coverage purchased: $800,000
  • An environmental event results in $50,000 worth of damage
  • After a $1,000 deductible, the insurance company covers $49,000

Scenario 2: Underinsured

  • Coverage purchased: $600,000
  • An environmental event results in $50,000 worth of damage
  • After a $1,000 deductible, your insurance carrier applies a coinsurance penalty:
    • ($600,000 / $800,000) = 0.75 penalty factor
    • Final payout: $36,750 instead of $49,000

In this case, being underinsured by $200,000 cost you $12,250 out-of-pocket—a costly mistake.

Why Does Coinsurance Exist?

Coinsurance clauses exist to prevent underinsurance and ensure policyholders maintain adequate coverage. Key reasoning behind this includes:

  • Risk Sharing – Policyholders share in the financial risk by maintaining proper insurance levels for their property.
  • Preventing Underinsurance – Ensures businesses don’t minimize coverage to save on premiums, which could leave them financially exposed.
  • Fair Premium Calculation – Encourages equitable premiums based on the property’s actual risk.
  • Adequate Compensation – Helps ensure insurance companies have sufficient funds to cover claims properly.

Ways to Avoid a Coinsurance Penalty

  • Insure your property to its full replacement value, not market value.
  • Reassess coverage annually, especially in times of rising construction costs.
  • Report property renovations to your Robertson Ryan Insurance Agent to ensure your coverage reflects any increased value.
  • Consider a waiver of coinsurance, if available, to avoid penalties on smaller claims or total losses.

Final Thoughts

Coinsurance is not just a policy clause—it is an important factor in ensuring your business is adequately protected. While it may seem like a way for insurers to reduce payouts, its primary goal is to encourage property owners to carry the right amount of coverage. A periodic review of your policy with your Robertson Ryan Insurance Agent can help confirm you are meeting coinsurance requirements and avoid unexpected financial burdens when filing a claim.

Don’t let coinsurance penalties catch you off guard. Protect your business by maintaining the right coverage and staying informed about how coinsurance works. For more content and coinsurance examples, please read here.