What it means
Commercial property policies often include a coinsurance condition, commonly 80, 90 or 100 percent. It requires the business to insure the property for at least that percentage of its value at the time of loss.
If the limit is too low, the insurer pays only part of the loss. The usual calculation divides the limit carried by the limit required, multiplies the result by the loss, then subtracts the deductible, with payment capped at the policy limit.
An agreed value option, where available, can suspend coinsurance for a period if the business provides a statement of values the insurer accepts. Regular valuation updates help avoid a penalty.
An example
Bayside Print Shop’s building is worth 1,000,000 at the time of a fire, and its policy has an 80 percent coinsurance condition, so it needs at least 800,000 of coverage. It carries 600,000. On a 100,000 loss with a 5,000 deductible, the insurer applies 600,000 divided by 800,000, or 75 percent, to the loss and subtracts the deductible, paying 70,000.
Names in this example are fictional.
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How do I avoid a coinsurance penalty?
Insure property at or above the required percentage of its current replacement cost or other valuation the policy uses, and update values regularly, especially after renovations, equipment purchases or rising construction costs. Where available, an agreed value option can suspend the coinsurance condition. A professional valuation can help set accurate limits.
Do business owners policies have coinsurance?
Many business owners policies handle property valuation differently from standalone commercial property forms, and some do not use a traditional coinsurance clause. Others include a similar condition or require insurance to value. Check the property section of the policy to see which approach applies before assuming no penalty exists.
General information only. It is not legal or insurance advice. Only issued policy documents and endorsements describe actual coverage.