How the property coinsurance clause works, a worked example of the penalty, and the practical ways to avoid it.
Most commercial property forms include a coinsurance condition. It requires the limit of insurance to be at least a set percentage — usually 80%, 90% or 100% — of the property’s replacement cost at the time of the loss.
The clause exists because premiums are calculated per dollar of limit. Without it, an insured could buy a small limit, pay a small premium, and still collect in full on the partial losses that make up most claims.
Payment = (Limit carried ÷ Limit required) × Loss − Deductible, never more than the limit. Adjusters call it “did over should.”
Example: a building worth $1,000,000 with 80% coinsurance should carry $800,000. If it carries $600,000, it collects only 75% of any loss. A $200,000 loss with a $2,500 deductible pays $147,500 — not $197,500.
The test uses value at the time of the loss, not at policy inception. Construction costs that rise 5% to 8% a year can push a building out of compliance mid-term even if the limit was right on day one.
Insure to 100% of current replacement cost, not market value. Add an inflation guard. For buildings that are hard to value, ask for an agreed value endorsement, which suspends coinsurance for the policy term when a signed statement of values is on file.