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Essential Insights for Mastering Coinsurance and Protecting Your Commercial Property

By June 6, 2024Insurance

Coinsurance is one of the most misunderstood concepts in insurance, and it’s essential for businesses to grasp how it works, especially within the realm of property insurance. Misunderstanding or overlooking coinsurance can result in unexpected financial penalties and inadequate claim payouts. This blog post aims to demystify coinsurance and its implications for commercial property insurance policyholders.

What is Coinsurance?

Coinsurance is a clause found in many commercial property insurance policies, serving as a mechanism for insurers to ensure policyholders purchase coverage close to the full value of their properties. Essentially, it acts as a penalty for underinsuring a property, incentivizing accurate valuation and sufficient coverage.

Why Do Insurers Use Coinsurance?

Insurers include coinsurance clauses to mitigate their financial risk. During the underwriting process, an insurer uses a property’s value to set premiums, limits, and deductibles. If a property is undervalued, the insurer may face higher-than-expected payouts after a loss. Coinsurance clauses shift some of this risk back to policyholders, encouraging them to provide accurate property valuations and purchase adequate coverage.

Moreover, insurers want to prevent businesses from purchasing minimal coverage that only addresses minor losses. While most property damage claims are relatively small, insurance is designed to cover catastrophic losses, such as the complete destruction of a building. Inadequate coverage can leave a business vulnerable, unable to recover from a significant loss.

How Coinsurance Penalties Work

Coinsurance clauses typically require a policyholder to insure their property for a minimum percentage of its value, commonly 80%. If a claim is filed and an inspection reveals that the coverage falls short of this threshold, the insurer will reduce the claim payout proportionately.

For example, suppose a business insures its property for $600,000, but an inspection after a loss determines the property’s value is $1 million. With an 80% coinsurance clause, the required coverage should be at least $800,000. The shortfall (25% in this case) will reduce the payout for any claims by that percentage. Thus, a $200,000 claim might be reduced to $150,000 due to insufficient coverage.

Examples of Coinsurance Impact

Example 1: No Coinsurance Penalty

After conducting an appraisal, a business purchases a commercial property policy that provides $900,000 in coverage. The policy also includes a coinsurance clause that requires coverage for at least 80 percent of the property’s value. After a fire causes $200,000 in damage, an inspection by the insurer finds that the property’s value is actually $1 million. However, because the policy’s limit ($900,000) is over the 80 percent minimum of the property value (in this case, $800,000), the insurer pays the full $200,000 for the claim.

Example 2: Coinsurance Lowers the Payout

The business mentioned in the previous example purchases a property policy with the same coinsurance clause. However, this time they don’t conduct an appraisal and only obtain $600,000 in coverage. Because the policy doesn’t meet the required $800,000, the insurer will lower all payouts by the percentage between the amount of coverage and the coinsurance clause. In this example, the 25 percent gap between the $600,000 of available coverage and $800,000 required by the policy would lower the $200,000 fire damage claim to $150,000.

Strategies to Remove Coinsurance Clauses

To avoid coinsurance penalties, businesses can negotiate with insurers to remove these clauses. Common strategies include:

  1. Agreed Value:

    • During underwriting, the policyholder and insurer agree on a set property value.

    • This agreed value is used for claims during the policy term, negating the need for post-loss appraisals.

  2. Value Reporting:

    • Regularly report the property’s value, including inventories, sales figures, and operating costs, to the insurer.

    • This method is particularly useful for businesses with seasonal fluctuations in value.


Coinsurance penalties can significantly hinder a business’s ability to recover from a loss. To avoid these pitfalls, it’s crucial to assess and accurately report your property’s value regularly. Work closely with your insurer to ensure your coverage meets or exceeds the required limits. By understanding and addressing the intricacies of coinsurance, businesses can better safeguard their assets and ensure they receive the full benefits of their property insurance policies.


For expert guidance and to secure comprehensive property insurance that protects against any loss, contact us at 740.593.7311 or clservice@bickleinsurance today.