Coinsurance

Coinsurance in property insurance requires the policyholder to insure the building (or contents) to at least a specified percentage of its full value — commonly 80% or 90%. If the insured carries less than the required percentage, the insurer applies a coinsurance penalty that reduces the claim payment proportionally to the shortfall.

The penalty formula compares the amount of insurance carried to the amount required. This clause encourages policyholders to maintain adequate limits so premiums reflect true exposure. It is distinct from health insurance coinsurance; in property claims it is purely a limit adequacy mechanism.

Accurate valuation of the building and periodic limit reviews are essential to avoid an unexpected reduction at claim time.

A building valued at $1,000,000 with an 80% coinsurance clause requires at least $800,000 in coverage. If the insured carries only $400,000 (half the required amount) and suffers a $200,000 loss, the insurer may pay only half of the otherwise covered loss after applying the coinsurance ratio.

Insureds often confuse coinsurance with a deductible or co-pay. Another mistake is using market value instead of replacement cost when calculating required limits — policies specify which valuation basis applies.