The “coinsurance clause” or “coinsurance penalty” deals with your promise to insure the property adequately to value. If you don’t keep your promise and there is a loss, your business becomes a “co-insurer” in the loss, which could have a serious financial impact on your company.

Commercial property policies generally have an 80%, 90%, or 100% coinsurance clause. Let’s use the 80% example. If your policy has an 80% coinsurance clause, you must carry a limit of insurance of at least 80% of the replacement cost at the time of loss to avoid the “coinsurance penalty.”

So it’s important to have accurate & updated information on what it would cost to replace your building and contents. Remember, we’re talking replacement cost (the cost to replace with like and kind quality).

Let’s look at an example based on an 80% coinsurance clause, and damage to your school building:

• Building Replacement Cost at the time of loss:  $1,000,000.
• Amount of Loss:  $200,000.
• Insurance Policy Limit on Building:  $700,000.
• Minimum Amount of Building Insurance Needed:  80% x $1,000,000 = $800,000.
• Percent of actual coverage due to being underinsured:  $700,000 divided by $800,000 = about 88%.
• Amount of Loss that is covered:  88% x $200,000 = $176,000.

*Note that this is a “partial loss” example. You can see it’s also essential to not just satisfy the minimum for coinsurance purposes but also to be adequately insured in the event of a total loss from something like a tornado or fire.