Coinsurance on Property Policies: How an Understated Limit Cuts Your Claim
Coinsurance is the reason a covered $100,000 loss pays $62,500. Nothing was excluded — you just insured for less than you agreed to.
- Coinsurance requires you to insure a stated percentage of full value, usually 80% to 100%
- The penalty applies to partial losses, which is nearly all property claims
- A worked example: 62.5% of a covered loss on a badly understated limit
- Agreed value endorsements remove the clause entirely
- Inflation guard and annual reviews keep limits current
What the clause says
Most commercial property policies require you to carry a limit equal to at least 80%, 90% or 100% of the property’s replacement value. In exchange, the insurer charges a lower rate than it would for a limit set at whatever you felt like.
If your limit falls below that share at the time of loss, the insurer pays only the proportion your limit bears to the required amount.
The arithmetic
A building has a $1,000,000 replacement value and the policy carries 80% coinsurance, so the required limit is $800,000. You insured it for $500,000.
A fire causes $100,000 of damage. The payment is $100,000 × ($500,000 ÷ $800,000) = $62,500, and the deductible comes off that. You are short $37,500 on a fully covered loss.
Note that this bites on partial losses. A total loss would pay the $500,000 limit — the penalty structure specifically punishes the common case.
Why limits drift
Construction cost inflation, equipment added and never scheduled, a build-out completed two years ago. Limits set at purchase and left alone are below value within a few years in most markets.
Inflation guard endorsements raise the limit automatically by a stated percentage each year, which slows the drift but does not replace an actual review.
The clean fix
An agreed value endorsement suspends the coinsurance clause: you and the insurer agree a value in advance, usually supported by a statement of values, and the penalty does not apply.
It is not free and it is not available on every policy, but on a building or an equipment schedule of any size it removes the single most common cause of an underpaid property claim.