Coinsurance
What Is Coinsurance (in Business Insurance)?
Coinsurance in business or property insurance is a policy clause that requires the insured to have a specific amount of coverage. This amount is typically 80%-100% of a property’s replacement cost value. Failure to carry this minimum amount can result in reduced claim payments.
This clause most often shows up in: commercial property, business personal property (BPP), building, and sometimes business income policies.
How Does Coinsurance Work?
In super-simplified terms: coinsurance is math. For better details, here’s an example:
Your commercial policy has an 80% coinsurance clause. This means you’re required to have coverage limits equal to at least 80% of your property’s value. Your coverage limits must meet that 80% amount to be insured correctly for that property.
Say your property’s estimated current value is $1,000,000. With your policy’s 80% coinsurance clause, your coverage limits need to be 80% of $1,000,000.
Required coverage limit = 0.80 × $1,000,000 = $800,000
In this case, if you have a $50,000 claim, you’ll receive the full $50,000 payout minus your deductible.
If you carry less than that 80% ($800,000), payouts for claims will be less, too. The reduction in claim payout is proportional to the amount of insurance you have.
Say you have $600,000 in insurance — $600,000 is only 75% of the $800,000 you’re supposed to have, according to your policy. This means in the event of a claim, your payment will also only be 75% of the total claim amount.
In this example, if you have a $50,000 claim, your payout before deductible will be 0.75 x $50,000 = $37,500.
The overall “formula” for calculating claim payouts that involve coinsurance clauses is:
Payout before deductible = (your actual coverage limits ÷ coverage limits you’re supposed to have) × claim amount
Using our policy and claim information from above, that generic formula turns into: ($600,000 ÷ $800,000) x $50,000 = $37,500
What If I Don’t Maintain the Required Coinsurance Limit?
Short answer: If you have a claim, you’ll get paid less.
Suppose your coverage limit is below the coinsurance requirement when a claim happens. In that case, the insurance company uses the (actual coverage limits ÷ coverage limits you’re supposed to have) × claim amount formula to calculate the payout, even on partial losses.
How Is the Value of My Business Property Determined for Coinsurance?
The value of your property is typically determined based on replacement cost. The replacement cost is the amount it would cost to replace the damaged property today, not what you purchased it for.
Your policy’s coverage details include the specifics of how your property’s value is determined. Avoid becoming unintentionally underinsured by:
- Getting an appraisal of your property at purchase (your insurance company may require this or have an appraiser for you to use)
- Reevaluating the property when you renew your policy
- Updating your policy when significant changes and improvements are made to the property
- Scheduling periodic appraisals every few years, even if there are no other reevaluation triggers
Coinsurance vs Deductible: What’s the Difference?
Coinsurance is a policy clause designed to make sure you’re insured “enough.”
A deductible is a set amount you pay on every claim.
If you don’t have the right coinsurance, it can reduce your claim payouts. If you have a deductible, it always applies to a claim.
| Coinsurance | Deductible | |
|---|---|---|
|
What it is |
ConteIt requires you to insure a set percentage of your property’s current value (e.g., 80–100%) |
A fixed amount you pay out of pocket on a covered claim |
|
When it applies |
Mainly property coverages (building, business personal property, and sometimes business income) |
Many coverages (property, some liability) shown on your policy |
|
Who controls it |
You choose from available limits; your insurer checks the value at claim time |
Set by the insurer, though in some cases you may be able to choose a deductible amount Higher deductible = lower premium |
|
How it affects payout |
If you are insured for too small an amount, a penalty formula trims the claim |
Always subtracted from the covered loss after any coinsurance calculation |
|
Typical numbers |
80%, 90%, or 100% |
$250, $500, $1,000, $2,500, etc. |
|
Goal |
Avoid the penalty by right-sizing limits to replacement cost |
Pick a comfort level you can afford if a loss happens. |
What it is
Coinsurance: It requires you to insure a set percentage of your property’s current value (e.g., 80–100%)
Deductible: A fixed amount you pay out of pocket on a covered claim
When it applies
Coinsurance: Mainly property coverages (building, business personal property, and sometimes business income)
Deductible: Many coverages (property, some liability) shown on your policy
Who controls it
Coinsurance: You choose from available limits; your insurer checks the value at claim time
Deductible: Set by the insurer, though in some cases you may be able to choose a deductible amount
Higher deductible = lower premium
How it affects payout
Coinsurance: If you are insured for too small an amount, a penalty formula trims the claim
Deductible: Always subtracted from the covered loss after any coinsurance calculation
Typical numbers
Coinsurance: 80%, 90%, or 100%
Deductible: $250, $500, $1,000, $2,500, etc.
Goal
Coinsurance: Avoid the penalty by right-sizing limits to replacement cost
Deductible: Pick a comfort level you can afford if a loss happens.
Get tailored coverage by selecting your industry below.