Co-Insurance

Co-insurance is a policy provision that requires you to insure a property to a minimum percentage of its actual value, typically 80 percent. If you fall short of that threshold, the carrier pays only a proportional share of any claim -- not the full damage amount -- even if your loss is well below your policy limit. It is one of the most misunderstood and costly policy mechanics in commercial property insurance.

Here is how the math works. Suppose your building would cost $1,000,000 to rebuild, and your policy has an 80 percent co-insurance requirement. You are required to carry at least $800,000 in coverage. If instead you only insure it for $500,000 and suffer a $200,000 fire loss, the carrier does not simply pay $200,000. They apply the co-insurance penalty: you carried $500,000 out of the required $800,000, which is 62.5 percent of what you should have. So they pay 62.5 percent of the loss: $125,000. You absorb the remaining $75,000 out of pocket, even though you had insurance and the total loss was well below your policy limit.

Co-insurance penalties appear most often on commercial property and landlord dwelling policies. The fix is simple: keep your coverage limit current with the actual rebuild cost. If construction costs have increased significantly in your area -- as they did dramatically after 2020 -- your insured value may have fallen below the co-insurance threshold without any change to your policy. An annual review of your building limit against current rebuild cost is the most effective way to avoid an unexpected penalty on an otherwise routine claim.