Coinsurance is included in many types of insurance policies, but it works differently in property insurance than it does in other policies. To ensure that the full value of your property is covered when you bring a claim, it’s important to understand how coinsurance works in property insurance. 

What is coinsurance in property insurance?

In commercial property insurance, coinsurance is the requirement that policyholders insure a minimum percentage of the property’s value in order to receive full coverage for claims. Insurers commonly require 80% of the property’s value to be covered, but the exact percentage can vary depending on the insurer and property in question. 

Why do insurers require coinsurance?

Coinsurance is included in most commercial property policies to discourage underinsurance. Because most property damage does not result in a total loss, some business owners may intentionally underinsure their property, essentially purchasing coverage for less than the full value of the property. Premiums are cheaper for a policy that covers a lower value, and businesses may be tempted to see underinsured property as a way to save on premiums while still having enough coverage for partial losses. 

It’s also possible for companies to unintentionally underinsure their property—for example, they may rely on an older appraisal that does not take current property values or replacement costs into account. For insurance companies, underinsurance greatly increases financial risks. By requiring coinsurance, insurers can protect themselves and lessen the risk to their funds. 

How does coinsurance affect your property insurance claims?

Insurers will apply a coinsurance penalty, essentially reducing the amount they will pay for a claim if the coinsurance minimum is not met. In cases where the property is underinsured, the insurer will reduce coverage proportionally, even if the loss is less than the limits of insurance. To arrive at the amount they will cover, insurance companies divide the limits of your policy by the limits that would be required by coinsurance. Your insurance payout would then be reduced by the percent difference between the two amounts. 

Examples:

• Coinsurance minimum met: A business purchases a commercial property policy with coverage for $600,000. The policy’s coinsurance requirement specifies coverage for at least 80% of the property’s value. A fire causes $400,000 worth of damage to the property. The insurer inspects the property and values it at $700,000. Even though the property is valued at a higher amount than the limit of the policy, the 80% coinsurance minimum—which would be $560,000—has been met. The insurer will pay the full $400,000 for the claim. 
• Coinsurance penalty applied: A business purchases a commercial property policy with coverage for $600,000. The insurer requires a coinsurance minimum of 80%. The business suffers a loss of $300,000. When the insurer appraises the property, it’s valued at $1 million. Because the business has only insured 60% of the value of its property—$600,000 coverage on property valued at $1 million—the insurer will apply a coinsurance penalty. Instead of paying for the full $300,000 claim, the insurer will only pay for 60% of the loss, or $180,000. The business would need to cover the remaining $120,000 on their own.

When you purchase a commercial property insurance policy, it’s a good idea to conduct an appraisal of your property to make sure you value your property accurately. If you guess at the value of your property, you could find yourself paying coinsurance penalties if the insurer finds that the estimate wasn’t accurate. In addition, it’s important to make sure that your valuation remains accurate over time so you aren’t blindsided by unexpected penalties. 

Can coinsurance be waived? 

Most commercial property insurance policies will include a coinsurance clause, but there are two common alternatives to coinsurance that may be relevant for some companies:  

Agreed Value

Agreed value is a set value for your property that insurers may use instead of appraising the value of your property after a loss. You may be able to negotiate with your insurer to determine an agreed value when you purchase a policy. If a claim arises, the insurer will use the agreed value to handle the loss. Because the value of the property is already agreed upon, this would eliminate the risk of a coinsurance penalty. However, it’s important to remember that agreed value is only in effect for the term of the policy and will need to be updated when you renew your policy. 

Value Reporting

Value reporting requires a business to regularly report the value of their current property and inventory. This alternative to coinsurance may be ideal for businesses whose property values vary over time depending on current inventory. For example, seasonal businesses may have much more inventory on hand during their busy season. Instead of having a coinsurance requirement, these businesses may choose value reporting. 

What is 100% coinsurance in property insurance?

One hundred percent coinsurance requires you to insure 100% of the value of your property. Premium rates are generally lower for policies that require 100% coinsurance. However, there is a higher risk of the policyholder being penalized if property is not valued accurately. If the insurer assesses the value of the property after a loss and finds that it has increased in value, the policyholder would have to pay a coinsurance penalty. 

Example:

• A company purchases a commercial property insurance policy with a 100% coinsurance clause to save on premiums. The company receives an appraisal for its building at $560,000 and purchases insurance for that amount. A severe storm damages the building. The company makes a claim for $200,000 of damage. When the insurer assesses the property, it finds that its value has risen to $700,000. Because the policyholder has insured only 80% of the property’s value, it will only receive funds to cover 80% of the loss, or $160,000.

Does coinsurance apply to business income?

Yes, coinsurance applies to business income coverage. To determine how much coverage is needed to meet coinsurance minimums for business income coverage, companies will need to calculate their expected net income and operating expenses for a policy year, deducting any expenses that would not continue while the business is temporarily closed. As with coinsurance for business property, the insured company would need to cover a certain percentage of their business income to receive full coverage. Because businesses can experience periods of growth, it’s important to regularly reevaluate your expected business income to make sure the estimate is accurate. 

Example:

• A business calculates its yearly business income at $2 million. Its policy has a coinsurance minimum of 80%. The company purchases $1.6 million in coverage. After a fire damages the company’s building, it is forced to stop operating for two months, and the business makes a business income claim for $350,000. Because the company’s coverage meets the coinsurance minimum, the business will receive the full value of their claim.

Final Word

Coinsurance can be a confusing concept and has different meanings depending on the type of insurance in question. When you purchase a commercial property insurance policy, it’s crucial to understand your insurer’s coinsurance requirements. By ensuring that your property is valued accurately and you have a suitable amount of coverage, you can rest assured that any claims that arise will be fully covered.