Definition:Coinsurance clause
📋 Coinsurance clause is a policy provision — most often found in commercial property insurance — that requires the policyholder to maintain coverage equal to a stated percentage of the property's actual or replacement cost value. If the insured fails to carry adequate limits, the clause imposes a penalty at the time of a claim, effectively making the policyholder bear a proportionate share of the loss. The standard threshold is typically 80%, though 90% and 100% coinsurance requirements also appear in the market.
⚙️ When a covered loss occurs, the adjuster applies a coinsurance formula: the amount of insurance actually carried is divided by the amount that should have been carried (the coinsurance percentage multiplied by the property's value at the time of loss), and the result is multiplied by the covered loss amount. If a building worth $1 million is insured for only $600,000 under an 80% coinsurance clause, the required coverage is $800,000. The insured has carried only 75% of that requirement, so the carrier pays just 75% of an otherwise covered loss, minus the applicable deductible. This calculation can dramatically reduce a payout and leave the policyholder exposed to significant out-of-pocket costs.
💡 From an underwriting standpoint, the coinsurance clause discourages deliberate underinsurance, which would otherwise allow policyholders to pay low premiums relative to their true exposure while still collecting full claim payments on partial losses. For agents and brokers, explaining the coinsurance clause — and ensuring that statements of values are current — is a critical part of the placement process. A client who inadvertently triggers a coinsurance penalty after a fire or storm often views the shortfall as a coverage failure, making accurate property valuation and regular policy reviews essential to maintaining trust and avoiding errors-and-omissions exposure.
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