In commercial property insurance, coinsurance is a condition that rewards insuring to value. The policy states a percentage, commonly 80%, 90% or 100%. If, at the time of a loss, the limit is less than that percentage of the property’s value, the insurer pays only part of the loss.
The standard formula:
(Limit carried ÷ limit required) × loss − deductible = payment
The “limit required” is the coinsurance percentage times the property’s value on the valuation basis the policy uses (replacement cost or actual cash value).
How it shows up in an agency
A warehouse is insured for $800,000 with 90% coinsurance. After years of rising construction costs, its replacement cost is $1.2 million, so the required limit is $1.08 million. A $200,000 fire loss with a $5,000 deductible pays:
($800,000 ÷ $1,080,000) × $200,000 − $5,000 = $143,148
The client absorbs about $52,000 they didn’t expect, and often blames the agency. That’s why agencies review building values at renewal, use replacement cost estimators, and keep the statement of values current.
Ways to reduce the risk
- Agreed value endorsements suspend coinsurance for a period if the insured submits a signed statement of values.
- Blanket limits across several buildings can absorb an undervalued one, though blanket policies often carry their own 90% or 100% coinsurance.
- Inflation guard raises limits automatically during the term.
Common confusion
- Not the health insurance meaning. In health insurance, coinsurance is a cost-sharing percentage. In property it’s an insurance-to-value penalty.
- Business income has its own coinsurance, based on projected income, not building value. See business income.
- Homeowners policies use a related but different “insurance to value” condition for replacement cost settlement. See replacement cost vs. ACV.