Coinsurance is a clause in property insurance policies that requires the insured to carry coverage equal to a certain percentage of the property’s value—commonly 80%, 90%, or 100%. It’s designed to encourage policyholders to insure their property to its full value.
- Example: If your building is worth $1,000,000 and your policy has a 90% coinsurance clause, you must carry at least $900,000 in coverage. If you carry less and suffer a partial loss, you’ll face a penalty.
How Does the Coinsurance Penalty Work?
If you don’t meet the required coverage amount, the insurer applies a formula:
Claim Payment = (Amount of Insurance Carried ÷ Amount Required) × Loss−Deductible
So underinsuring can cost you significantly in a claim.
Scenario 1: Fully Insured (No Penalty)
- Building Value: $1,000,000
- Coinsurance Requirement: 90% → $900,000
- Insurance Carried: $900,000 (meets requirement)
- Loss: $400,000
- Deductible: $1,000
✅ You get $399,000 after deductible.
Scenario 2: Underinsured (Penalty Applies)
- Building Value: $1,000,000
- Coinsurance Requirement: 90% → $900,000
- Insurance Carried: $600,000 (underinsured)
- Loss: $400,000
- Deductible: $1,000
✅ You only get $266,800 instead of $399,000.
Why is 100% Coinsurance Often Less Expensive than 90%?
This seems counterintuitive, but here’s why:
- Risk for the Insurer:
- At 90% coinsurance, the insurer assumes you might insure for less than full value (e.g., 90% of $1M = $900K). This creates a risk that the property isn’t fully covered.
- At 100% coinsurance, you agree to insure the building for its full value, reducing the insurer’s risk of underinsurance.
- Premium Calculation:
- Policies with 100% coinsurance often have lower rates because the insurer knows you’re committing to full value coverage.
- With 90% coinsurance, the insurer charges a slightly higher rate to offset the risk that you might not meet the requirement.
- Market Behavior:
- Insurers incentivize full-value coverage because it aligns with proper risk management. Lower rates for 100% coinsurance encourage compliance.
✅ Bottom Line:
- 100% coinsurance = lower rate per $1 of coverage because it guarantees full value coverage.
- 90% coinsurance = higher rate per $1 of coverage because there’s more risk of underinsurance.
Whether you are purchasing a multifamily in Elizabethtown, Reading, or Allentown, buying a warehouse outside of Harrisburg alongside I-83 or route 283, or just want to cover an office building around Lancaster County, reach out to as Igloo Insurance to evaluate your commercial building insurance needs.