How Does Coinsurance for Commercial Property Insurance Work?

Picking your commercial property insurance coverage limits may be more important than you think.

This is especially the case if your insurance carrier requires a coinsurance. With a coinsurance, if you don’t have the proper coverage limits, it can affect your payout for any property insurance claim you may have.

We know this first hand. At Berry Insurance, we guide many of our business clients through selecting adequate coverage limits so they are 1) fully protected, and 2) meeting their coinsurance clauses.

A fair share of these clients have asked us if they could lower their property coverage limits to save a few bucks, and if they have a coinsurance clause, our answer is always a resounding “NO!”

And if you have a coinsurance, the same applies to you. Read on to learn more about what a property insurance coinsurance is, and how it works.

What is property insurance coinsurance?

In the insurance world, coinsurance can mean a few different things depending on the type of insurance.

For property insurance, coinsurance is a provision from the insurance carrier that requires you to insure a certain percentage of your property’s value. 

Usually that percentage is 80%, but it could also be 90% or even 100%.

This means if your coinsurance is 80% and the total value of your cumulative business property is $1,000,000, your property insurance limits must be at least $800,000.

If a business buys less than the required amount, the insurance company may penalize the business by not fully covering the claim in the event of a disaster, even if the claim is within property limits.

Why does my carrier require coinsurance?

While coinsurance clauses are not included in every property insurance policy, many carriers choose to require it for a number of reasons.

The most obvious is to ensure their policyholders have adequate coverage if there were ever a disaster. Many people may want to under-insure their property under the assumption that a disaster would never damage 100% of their property, but insurance companies know it is possible and want their clients to have full coverage so their business wouldn’t face a detrimental financial hardship in an unexpected situation.

Your insurance company may also want accurate property values on your policy to better understand your business so they can provide helpful insurance guidance and be prepared to handle a claim, if it ever were to happen.

How does coinsurance work?

If your property insurance has a coinsurance clause, you will need to make sure you insure at least 80% of all of your property value. This means your building value (if you own it) and all of the business possessions you own. 

Better yet, we always recommend our clients insure 100% of all their property value. This leaves some cushion to be extra sure you aren’t violating the coinsurance clause, and it also guarantees that all your property would be covered if you experienced a total loss from a fire or some other disaster.

If you adhere to your coinsurance clause, then this is all you really need to know! If you have a claim, you will just file it as normal and be paid out without any penalty. 

But what if you violate the clause by failing to insure the required value of your property?

Well, if you have a claim, your insurance company may penalize you by not paying for the full claim.

Many people assume this would only happen if the claim exceeds their property limits, but that isn't the case. Those who violate the clause can be penalized for a claim of any amount, even if it is well within the coverage limits.

Remember that example we talked about earlier? Let’s expand on that. 

If you own a business that has $1 million of property value and an 80% coinsurance, your coinsurance clause will require that you get at least $800,000 in property coverage.

If you only get $600,000 in coverage, then have a claim, the insurance company will conduct a calculation based on the amount of coverage you failed to buy to determine how much they will pay you.

For example, if under this scenario you were to have a claim with $300,000 in damage, the carrier will calculate the percentage of the required coverage you actually have (75% in this case), then use that percentage to determine your payout amount.

So if the carrier is only paying 75% of your claim, you will only be paid $225,000 of the total $300,000 in damage, minus any deductible you have.

Cover all your property -- it’s worth it.

If you never have a claim, coinsurance may never actually come into play for you.

But even if you never do expect to have a claim, coinsurance is something you need to be thinking about, because if you violate the clause, it would affect the payout amount of any claim, if the unexpected were to happen. 

When establishing your policy, you need to carefully calculate the value of all of your business property to make sure you are fulfilling your obligations set in the clause. But wait! That effort alone isn’t enough. You also need to review your policy often, to make sure it includes the value of any additional property you may add as your business changes or grows. 

To learn more about how to make sure your policy is up to date, check out this article: Why You Should Review Your Commercial Insurance Annually.