what is coinsurance in property insurance?

What is Coinsurance in Property Insurance?

Coinsurance is used by property insurance companies to encourage owners to insure their properties at full value (or as close to full value) as possible.

Property insurance cost is determined using “COPE data”  property insurance values and premiums.

If you have a coinsurance clause in your property insurance policy, you must insure your property to the percentage required, or you may experience a penalty in the event of a claim. 

Also, beware, some commercial lenders may prohibit coinsurance (aka “co-insurance”) provisions in commercial mortgage covenants.

If you have co-insurance, you can use the coinsurance calculator below to estimate your particular insurance situation.

What is Coinsurance?

Coinsurance is an “insure to value” strategy employed by insurance companies. 

Having such a clause will require you to insure your property to a minimum value percentage (such as 80%, 90% or 100%) of actual value or you could suffer a penalty in the event of filing a property insurance claim.

Coinsurance clauses are found in many types of insurance policies, not just commercial property. These clauses may also be found in dwelling forms, homeowner’s, health insurance, federal flood policies and even D&O. 

Below is an example of how coinsurance works. 

And you can use this simple coinsurance calculator to determine whether your property insurance policy meets the requirement in your coinsurance clause – and what your penalty might be in the event of a claim if you do not meet the requirement.

Coinsurance Claim Example

Let’s say you have a building that is worth $1,000,000 and your property policy has an 80% coinsurance clause and a $5,000 deductible. 

Because of the 80% coinsurance clause, you are required to maintain at least $800,000 of insurance coverage on your property (80% * $1,000,000).

If you do not you will suffer a penalty in the event of a claim. 

However, let’s say you’re not really worried about having a claim and you want to save a little money, so you only insure your building to a value of $600,000. 

One day the property manager calls to report a fire at the building that causes $100,000 in damage. 

You tell the property manager to call the insurance company to file the claim. 

But what will the insurance company do about the coinsurance calculation?

In this case, the insurance company is going to run a calculation dividing the amount of insurance that you have ($600,000) by the minimum amount of insurance that you’re supposed to have ($800,000).

They’ll come up with 75% ($600,000 divided by $800,000 is 0.75 or 75%).

Next they’ll multiply 75% times the claim and then subtract the deductible. 

So if you file a $100,000 claim, you will only receive $70,000 back from the insurance company because you under-insured your building. 

Commercial Lender Requirements

Commercial lenders may prohibit mortgagors from having a co-insurance clause as part of their insurance requirements. 

If a commercial lender does allow coinsurance, there may be limits. For instance, the lender’s mortgage covenants may be breached if the minimum amount of insurance is not maintained to comply with coinsurance limits. 

A commercial lender may prohibit coinsurance because they want to avoid being caught without proper compensation in the event of a claim payout that is significantly reduced due to the failure of the mortgagor to be in compliance with their coinsurance clause. 

Considerations For Green Building Retrofits

It’s important that your compliance with any coinsurance requirements be updated over time.

For instance, if you have not reviewed your property portfolio insurance in a long time, you should check with your broker, because your property values may have changed.

Property insurance cost is determined by four factors known as “COPE data” of which “construction” is one factor… As such, any building improvements you have made may have an impact on your insurance.

Are you investing in retrofitting your building to make it more efficient, such as upgrading your boiler or chiller or adding LED lighting or installing new windows?

If so, check your property insurance policy for a coinsurance clause.

Make sure the value of your property insurance limit is in-line with any coinsurance percentage requirement.

Chances are your building will be more valuable after your green building upgrade and you don’t want to suffer a penalty in the event of a claim.

If you have questions about co-insurance or your property insurance policies or green building retrofits, for that matter, feel free to schedule an appointment with me.

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