Most property insurance policies contain a coinsurance provision.  This provision requires the insured to insure their covered property up to a specific percentage of the total value (normally 80%, 90% or 100%).

If your insured does not carry adequate property limits, they could be underinsured and in for a most unpleasant surprise called a Coinsurance Penalty should a partial loss occur!

Coinsurance Penalties are nasty things!  They can reduce the amount paid on a loss and put your insured’s business in jeopardy.

Here’s a basic example of what happens when a building is underinsured and a partial loss occurs:

A building is valued at $250,000, but is insured for only $100,000 with 80% Coinsurance and a $5,000 deductible.  A fire loss occurs causing $40,000 worth of damage to the building:

Building value at time of loss = $250,000

Building limit on policy = $100,000

The limit of insurance should be at least $250,000 x 80% = $200,000

Because the amount of insurance is only 50% of the amount required (100,000 ÷ $200,000 = .50), coverage is afforded for only 50% of the repair cost, minus the deductible:

The cost to repair the fire damage = $40,000

50% of the repair cost is $40,000 x .50 = $20,000

The deductible = $5,000

The total amount that may be paid on this $40,000 loss = $15,000

What can you do to prevent this from happening to you and/or your insureds? 

  1. Review the property limits periodically.  Take into account any improvements that have been made and adjust the limits as needed.  
  2. Do a building cost estimate. Some carriers provide a building cost estimator program to their agents.  There are also many building cost estimator programs available on-line and that can be purchased.  
  3. Hire an a professional appraiser
  4. Ask if the insurance carrier will offer ‘Agreed Value Coverage’.   Agreed Value is a property value that both you and the insurance company agree upon at the beginning of the policy period.

Please contact our experienced staff at E&L for applications or questions, or visit our website:

Disclaimer: This post is intended for general information purposes only. The information contained is not intended to constitute and should not be considered legal or professional advice, nor does it represent that coverage does or does not exist for any particular claim or loss under any policy.