Many business owners and landlords have a coinsurance clause in their commercial property policy and don't know it until a claim. If the building or contents are insured for too little, the insurer can reduce the payment on even a small, partial loss. Understanding how coinsurance works, and how to avoid the penalty, is one of the easiest ways to protect your business. This guide explains the basics with simple examples.
What is a coinsurance clause?
A coinsurance clause requires you to insure your property for at least a set percentage of its value, commonly 80%, 90% or 100%. The value is usually replacement cost or actual cash value, depending on the policy. If your limit falls below that requirement at the time of the loss, the insurer may pay only a portion of the claim, and you share the loss. That's why it's called coinsurance: you become a co-insurer of your own property.
Coinsurance in property insurance is different from coinsurance in health insurance, where you pay a percentage of medical costs after your deductible.
The coinsurance formula
Commercial property policies commonly use this formula:
(Limit you carried ÷ Limit you should have carried) × Loss − Deductible = Payment
The amount you should have carried is the property's value multiplied by the coinsurance percentage. The payment can't exceed your limit.
Example 1: adequately insured
- Building replacement cost at the time of loss: $1,000,000
- Coinsurance requirement: 80%, so you should carry at least $800,000
- Limit carried: $800,000
- Loss: $200,000; deductible: $5,000
Because you met the requirement, the insurer pays $200,000 − $5,000 = $195,000.
Example 2: underinsured
- Same building and requirement, so you should carry $800,000
- Limit carried: $600,000
- Loss: $200,000; deductible: $5,000
($600,000 ÷ $800,000) = 0.75. 0.75 × $200,000 = $150,000. Minus the $5,000 deductible = $145,000. You absorb $55,000, even though the loss was far below your limit.
These examples are for illustration only; actual policy wording controls how the formula applies, including how the deductible is applied.
Why businesses fall short
- Rising construction costs push replacement cost up while the limit stays flat.
- Improvements like tenant build-outs, new equipment or expansions aren't reported.
- Using market value or purchase price instead of replacement cost.
- Inventory swings, for example seasonal stock that exceeds the contents limit.
- Outdated valuations that haven't been reviewed in years.
How to avoid a coinsurance penalty
Get a current valuation
Have the building's replacement cost estimated periodically by your insurer, a broker or a professional appraiser. Update it after improvements. Many of the same principles apply as for homes; see our home insurance coverage worksheet and underinsurance warning signs guide.
Ask for an agreed value endorsement
An agreed value (or agreed amount) option suspends the coinsurance clause for a set period, typically a year, if you and the insurer agree on the property's value, usually based on a signed statement of values. You must renew it and update the values to keep it in force.
Use inflation guard
An inflation guard automatically increases your limit by a set percentage over the policy term. See our inflation guard guide.
Consider blanket limits
A blanket limit applies one limit across multiple buildings or locations, or across building and contents. It gives you flexibility if one location is worth more than expected. Blanket policies may still carry coinsurance or require a statement of values, so ask how it applies.
Use peak season or reporting forms for inventory
Businesses with fluctuating inventory can use peak season endorsements or reporting forms to match coverage with stock levels.
Choose a lower coinsurance percentage or none
Some insurers offer lower coinsurance percentages or policies without coinsurance, possibly at a different premium. Ask your broker.
Business income coinsurance
Business income coverage may also include a coinsurance clause, based on your expected income and expenses over the coming year. A business income worksheet helps set the right limit. Options such as monthly limit of indemnity or maximum period of indemnity may replace coinsurance. See our business interruption guide.
What happens at claim time
After a loss, the adjuster may estimate the property's value at the time of the loss and compare it with your limit. Keep records that support your values, such as appraisals, statements of values, contractor estimates and invoices for improvements. If you disagree with the insurer's valuation, ask for its calculations in writing. Many commercial policies also include an appraisal clause for disputes over the amount of loss. See our claim denied appeal guide.
Landlords and small property owners
If you own a small apartment building, a mixed-use property or a commercial building you lease to tenants, check whether your policy has a coinsurance clause and whether your limit is current. See our commercial property insurance for small landlords guide and the NAIC's consumer insurance resources.
Coinsurance checklist
- ☐ Find the coinsurance percentage on your declarations page
- ☐ Confirm whether it's based on replacement cost or actual cash value
- ☐ Get a current valuation and update it after improvements
- ☐ Ask about agreed value, inflation guard and blanket limits
- ☐ Review business income limits with a worksheet
- ☐ Use peak season or reporting forms for fluctuating inventory
- ☐ Review values every year at renewal
Contact Alishahi Insurance or call (877) 711-4545 for a commercial property review.
Frequently asked questions
What is a coinsurance clause?
A requirement to insure property for at least a set percentage of its value, commonly 80%, 90% or 100%. If you carry less, the insurer may reduce claim payments.
How is the coinsurance penalty calculated?
Commonly, (limit carried ÷ limit required) × loss, minus the deductible, up to the limit. Actual policy wording controls.
Does coinsurance apply to small claims?
Yes. The penalty can reduce payments on partial losses, not just total losses.
What is an agreed value endorsement?
An option that suspends the coinsurance clause for a set period, typically a year, when you and the insurer agree on the property's value.
Is property coinsurance the same as health insurance coinsurance?
No. In health insurance, coinsurance is your share of medical costs after the deductible.
Alishahi Insurance · 439 N Canon Dr, Penthouse, Beverly Hills, CA 90210 · (877) 711-4545 · CA License #4348151. General information only. This isn't legal, tax or financial advice or a coverage determination. Coverage depends on policy language and underwriting, and rules vary by state.