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R&R Insurance Blog

Coinsurance Penalties | How to Avoid Any Unpleasant Surprises

Posted by Sandy Hein

iStock_76526599_LARGE.jpgCoinsurance is the percentage of property value that the policyholder is required to insure.

If one insures the property for less than that amount, the insurance company imposes a "coinsurance penalty" once a claim is filed.  The value is determined at the time of the loss. If the amount of insurance is found to be under the stated coinsurance percentage, then a penalty is applied reducing the claim payment.

Most business policies include a "coinsurance" clause, determining what percentage of its value the property must be insured for in order to be fully reimbursed for a loss.

Example: There is a building that one believes would cost $100,000 to replace and a coinsurance penalty in the policy of 80 percent. One insures the building for $80,000 thinking they have fulfilled the coinsurance clause. A fire loss causes $60,000 worth of damage so a claim is submitted. The insurance company subsequently determines that the replacement cost of the building is actually $150,000.

To determine how much to pay on the claim, the insurer divides the amount of insurance purchased ($80,000) by the amount that should have been purchased (80% of $150,000 or $120,000). The result (two-thirds, or $40,000) is the amount of the claim the insurer will pay.

If the building had been insured for at least $120,000, the insurer would have been reimbursed for the full amount of the loss.


Coinsurance can be tricky and could end up having a high cost if one under insures the property.

Reach out to one of R&R's Knowledge Brokers to ensure that you have the proper amount of coverage and to clarify any questions you may have on coinsurance.



Topics: Business Insurance, coinsurance, coinsurance penalty

Understand the Fallout From a Coinsurance Penalty

Posted by Pam Rhode

Office-Building-Blog-ImageWhile it may seem complex, understanding the basics of a coinsurance penalty will save you from any surprises down the road. The first step in gaining an understanding starts with the Coinsurance Clause.


A Coinsurance Clause is a property insurance provision that penalizes the insured's loss recovery if the limit of insurance purchased by the insured is not at least equal to a specified percentage of the value of the insured property. The coinsurance provision specifies that the insured will recover no more than the following:


Insurance Carried

--------------------------- x Loss = Amount Recoverable

Insurance Required


As an example:

A building actually valued at $1,000,000 has an 80% coinsurance clause but is insured for only $750,000. Since its insured value is less than 80% of its actual value, when it suffers a loss, the insurance payout will be subject to the underreporting penalty. Assume it suffers a $200,000 loss:

$750,000 ÷ (0.80 × 1,000,000) × 200,000 = $187,500 Payout (less any deductible).

In this example, the underreporting penalty would be $12,500.

Business income coinsurance is solely a function of time; a 12-month period of time to be more specific. How long will it take, following a worst-case-scenario loss, to return the operation to pre-loss condition and capabilities? Knowing this allows the insured to accomplish two tasks:

1) Pick the correct coinsurance.

2) Ultimately decide on the limit of business income coverage to purchase (again, the amount subject to loss is a function of the coinsurance percentage and the percentage a function of time).

  • 100 percent = 12 months (12 months x 100%) Estimated Loss of Income (Amount Subject to Loss) Calculation: • Maximum Coinsurance Percentage x 12 months business income calculation = Amount Subject to Loss

As an example:

The policy states there is a $1M limit with 50% coinsurance. This means the 100% amount would be $2M. If, at the time of loss, the 100% amount was $3M, then the limit should be $1.5M (50% of $3M). Therefore the insured would be penalized 33% of their claim, and paid $1M versus $1.5M.


Contact your knowledge broker to learn more about how to avoid the potential fallout from a coinsurance penalty.

Topics: Business Insurance, coinsurance, coinsurance penalty