Coinsurance penalty calculator

How the coinsurance clause works

Most commercial property forms include a coinsurance clause, which sets a minimum amount of insurance the policyholder must carry relative to the property’s replacement cost. That minimum is expressed as a percentage — typically 80%, 90%, or 100% — multiplied by the replacement cost at the time of loss. Carry less than that, and the insurer treats the policyholder as a partial self-insurer, sharing the loss in proportion to how underinsured the property actually was.

The clause exists to keep premiums fair. Because premium rates for a coinsurance percentage assume the insured is carrying an adequate limit, a policyholder who buys a low limit but pays a rate built for full coverage would otherwise get a discount they didn’t earn. The penalty formula corrects for that gap at claim time.

Which valuation figure actually applies

The percentage isn’t applied against market value, assessed value, or what the building last sold for — it’s applied against whatever valuation basis the policy itself is written on. On a replacement cost policy, which is standard on most commercial property forms today, that means the full cost to rebuild the structure new, at current construction prices, with no deduction for depreciation. On an actual cash value policy, it means replacement cost less depreciation. Since that figure moves with construction costs and can drift well away from a building’s purchase price or tax assessment, it’s worth confirming which basis a given policy uses before assuming the required limit is correct.

Reading the formula

The payout is calculated as the ratio of coverage purchased (C) to coverage required (R), multiplied by the loss (L), minus the deductible (D). The required amount, R, is the property’s replacement cost multiplied by the coinsurance percentage in the policy. The C/R ratio is capped at 1.0 — carrying more insurance than required doesn’t increase the payout beyond the loss itself, it only removes any penalty.

Why it rarely matters on a total loss

On a total loss, the payout is bound by the policy limit regardless of the coinsurance math, so an underinsured policyholder loses the same amount they would have lost anyway — the gap between what they carried and what it actually cost to replace the property. The coinsurance penalty shows up specifically on partial losses, where the shortfall in the limit reduces a claim that would otherwise have been paid in full.

Worked example

A building with a replacement cost of $1,000,000 carries an 80% coinsurance requirement, putting the required limit at $800,000. The policyholder purchased only $600,000 in coverage, and a $200,000 partial loss occurs with a $1,000 deductible.

Had the same building carried the full $800,000 required limit, the $200,000 loss would have paid out at $199,000 after the deductible. Being underinsured by 25% cost this policyholder $50,000 on a single partial loss.

Why this is worth checking before a loss happens

Coinsurance compliance depends on replacement cost at the time of loss, not the figure used when the policy was first written or the price the property last sold for. Construction cost inflation, renovations, and additions can all push replacement cost above a limit that looked adequate a few years ago, quietly opening a coinsurance gap the policyholder doesn’t discover until a partial loss is already in claim. A periodic replacement cost estimate — not a market value opinion — is the right way to catch this before it becomes a penalty.