Coinsurance

A coinsurance clause requires the owner to carry insurance equal to a stated percentage of the property's value — eighty percent is the usual figure, with ninety and one hundred also common.

Insure for less, and every claim payment is reduced in proportion.

The arithmetic#

Divide the amount carried by the amount required, and apply that fraction to the loss.

A building requiring eight hundred thousand of coverage under an eighty percent clause, insured for six hundred thousand, is carrying three-quarters of what was required. A covered loss pays three-quarters, less the deductible.

The crucial point: this applies to partial losses too. A forty-thousand dollar fire on an underinsured building pays thirty thousand. The penalty is not reserved for total losses; it applies to every claim.

Why insurers require it#

Without it, rational owners would underinsure deliberately.

Total losses are rare. Most claims are partial. An owner who insures a million-dollar building for two hundred thousand pays a fraction of the premium and still collects in full on the small and medium losses that actually happen.

Coinsurance removes that arbitrage by making the premium proportional to the coverage across all losses rather than only catastrophic ones.

How owners breach it without doing anything#

This is the failure mode worth understanding, because it requires no decision.

Construction costs rise. The building's replacement cost rises with them. The policy limit, set years ago and renewed automatically, does not.

At some point the ratio crosses the threshold and the property is in breach — and nobody is notified, because nobody is measuring. The discovery happens at the claim.

The same drift happens after improvements. An owner who adds square footage or substantially renovates has increased the replacement cost and frequently has not told the insurer.

Agreed value#

Many commercial policies offer an agreed value endorsement, which suspends the coinsurance clause in exchange for the insurer and the owner agreeing the building's value up front, usually supported by a valuation.

It costs something and it removes the risk of a penalty entirely. For any property where an underinsurance penalty would be unaffordable — which is most of them — it is worth pricing.

Where it bites hardest#

Landlords and small commercial owners, who carry explicit coinsurance clauses far more often than homeowners do, and who are least likely to have revisited a limit set at purchase.

A property that has been insured on autopilot for a decade, in a period when construction costs moved substantially, is the classic case.