Facts You Should Know About Commercial Property Coinsurance

Posted by: Agent Hub

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Coinsurance in the property insurance industry can be a confusing topic. When an insured hears the word coinsurance, they may imagine that it works the same way as medical insurance, in which the insured pays a certain percentage and the insurance company covers the remaining balance. However, this is not the case when it comes to commercial property. Let’s break down some of the most important things you should know about how coinsurance works in the commercial property insurance industry.

Why Learn About Coinsurance?

Coinsurance plays a major role in the commercial property industry. While it is in an insured’s best interest to select a lower coinsurance option to avoid penalties, it is more important to make sure a risk is insured to value. It is true that most claims are not total losses, but when a total loss does occur, it is best to have adequate coverage.

How Does Coinsurance Work?

Coinsurance in a commercial property policy does not come into play until a loss occurs. When this event happens, the replacement cost is assessed at the time of the loss to determine the limit of insurance that should be in place. Depending on the coinsurance percentage selected in the policy, an insured may only have to cover up to a certain amount to avoid a coinsurance penalty. The following example explains how the coinsurance percentage is calculated in the event of a loss.

An Example of Coinsurance Percentage

Donna has an apartment building that was damaged by a windstorm. The policy for the building and personal property has a current limit of $500,000 and a 90 percent coinsurance option. Upon inspection of the damage, the building replacement cost was determined to be $550,000. There was a loss of $10,000 on the property and the deductible is $1,000. View the table below to find out if Donna falls within the coinsurance allowance.

Value of Property at Time of Loss $550,000
Coinsurance Percentage 90%
Limit of Insurance on Policy $500,000
Minimum Amount Required for Coinsurance ($550,000*90%) $495,000
Within Coinsurance Limit ($495,000 is required, they have $500,000)    Yes
Coinsurance Penalty 0
Cost of Loss $10,000
Deductible $1,000
Amount Recovered from Insured (Loss-Deductible) $9,000

However, if Donna had 100 percent coinsurance, then she would have been assessed a penalty for being underinsured. Take a look at the table below to learn how the coinsurance penalty affects the loss payout.

Value of Property at Time of Loss $550,000
Coinsurance Percentage 100%
Limit of Insurance on Policy $500,000
Minimum Amount for Coinsurance ($550,000*100%) $550,000
Within Coinsurance Limit ($550,000 is required, they have $500,000)     No
Coinsurance Penalty ($500,000/$550,000=0.909) 0.909
Cost of Loss $10,000
Loss Amount Minus Coinsurance Penalty ($10,000*0.909) $9,090
Deductible $1,000
Amount Recovered from Insured (Loss-Deductible) $8,090


Coinsurance Formulas

In the event that an insured has a loss and you need to determine if they fall within the coinsurance allowance, follow these simple formulas:

Step 1: Determine if the coinsurance penalty applies:


Step 2: If the coinsurance penalty applies, the following coinsurance formula is used to determine loss payout.


What is an Agreed Amount?

Agreed Amount is a property insurance provision in which the insurer agrees to waive the coinsurance requirement. To waive coinsurance and apply Agreed Amount, a recent appraisal or an MSB (Marshall & Swift/Boeckh) replacement cost estimate must be provided to ensure the building is insured to value. Agreed Amount removes the possibility of a coinsurance penalty, even if the value of the property at the time of a loss is higher than the policy limits.