Coinsurance is a standard clause in many property insurance policies, and it applies to more than just buildings. It can also apply to business personal property (BPP) like furniture, equipment, inventory, and improvements you’ve made to a space.
Here’s the basic idea: the policy requires you to carry insurance equal to a certain percentage of the property’s value, typically 80%, 90%, or 100%. If you insure for less than that, the carrier can reduce what they pay on a claim, even if the loss is only partial.
At the time of a loss, the insurer compares:
- the amount of insurance you carried, vs.
- the amount you should have carried based on the coinsurance requirement
If you’re short, the claim payment gets reduced in proportion to the underinsurance.
Example: your building has a $1,000,000 replacement cost and the policy has a 90% coinsurance clause. You should carry at least $900,000. Instead, you carry $600,000. You then have a $300,000 covered loss. Since $600,000 is only two-thirds of the required amount, the insurer may only pay two-thirds of the loss (minus the deductible). That would be about $200,000, leaving you to fund the remaining $100,000 out of pocket.
The same exact problem can happen with business personal property. If your contents have grown over time but the BPP limit hasn’t kept up, you can be underinsured without realizing it.
Coinsurance catches people because values change. Construction costs rise. Businesses buy more equipment. Inventory increases. Tenant improvements get added. But insurance limits often stay flat year after year unless someone actively updates them.
The takeaway: don’t treat your building limit and your BPP limit like “set it and forget it” numbers. Review them regularly so a coinsurance penalty doesn’t turn a manageable claim into an expensive surprise.regularly so a coinsurance penalty doesn’t turn a manageable claim into an expensive surprise.
