Valuable Coverage

by Katie Lee

— By Doug Groves —

Is your commercial property insured correctly?


The world of property ownership has changed dramatically in recent years. With interest rates increasing, the overall cost of building materials going up, and the market value of properties also on the rise, it is more important than ever to know what’s covered in your insurance policy and what you are actually paying for . . . and if you are paying enough. More and more property owners who experience loss are shocked to learn after the fact that they are actually co-insurers with their insurance company. Being a co-insurer means the property owner is responsible for paying part of the overall loss — and for many property owners that part could be larger than they are prepared to pay.

The Coinsurance Clause

Doug Groves

Unfortunately, property values are not aligned with what most people think their property is worth. In some states, people have property insured for way less than what the cost would be to complete the repair. The problem lies in the coinsurance clause, which is present in most property insurance policies (both commercial and residential).

Coinsurance is a clause used in insurance contracts by insurance companies. This clause ensures policyholders insure their property to an appropriate value and that the insurer receives a fair premium for the risk. This clause requires a homeowner to purchase 80% to 90% actual replacement cost coverage to qualify for replacement cost. If their home is underinsured, they will not qualify and they will become a co-insurer and will take responsibility for paying the remaining percentage.

How the Coinsurance Formula Works:


  • To calculate the coinsurance formula, begin by dividing the actual amount of coverage on the house by the amount that should have been carried (80% of the replacement value). Then, multiply this amount by the amount of the loss, and this will give you the amount of the reimbursement. If this reimbursement value is greater than the specified limits of a single insurance company, a secondary coinsurer will supply the remaining funds.
  • Coinsurance is usually expressed as a percentage. Most coinsurance clauses require policyholders to insure to 80%, 90% or 100% of a property’s actual value. For instance, a building valued at $1,000,000 replacement value with a coinsurance clause of 90% must be insured for no less than $900,000. The same building with an 80% coinsurance clause must be insured for no less than $800,000.

Key Takeaways:


  • The coinsurance formula determines the amount of reimbursement that a property owner will receive from a claim.
  • The coinsurance formula is applied when a property owner fails to maintain coverage of at least 80% of the property’s replacement value.
  • If a property owner insures for less than the amount required by the coinsurance clause, they are essentially agreeing to retain part of the risk.
  • In this case, the owner becomes a co-insurer and will share any loss with the insurance company according to the coinsurance formula.

Why Are Prices Going Up?

Knowing if your property is covered or if you are at risk for paying a large percentage of your loss can be confusing, especially when the conditions surrounding the housing market are riddled with issues like the rising costs of building materials due to issues in the supply chain and costs associated with inflation. Just to be clear, this coinsurance clause is tied to the actual replacement cost of the property. This can be a point of confusion as some may assume the replacement cost is related to the market value of the property. When in reality, market value has nothing to do with replacement value. However, market value invariably does force replacement cost increases or decreases depending on the conditions of the market.

Fight Fire with Fire

To better understand your coverage, schedule a consultation with your insurance provider to make sure you are covered and, in the event of an accident, you are not left paying a larger percentage than you bargained for. To protect your business, your customers and even your personal property, a review of your insurance policy with a qualified provider is critical to ensuring your total risk is explained and covered should a catastrophic event occur.




— Doug Groves is founder of Program Insurance Group. For more information, visit




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