Co-Insurance and Commercial Property Insurance

Understanding Coinsurance Penalties in Commercial Insurance
When it comes to commercial insurance, one of the most overlooked yet crucial aspects is understanding coinsurance penalties. Whether you own a commercial building or operate heavy construction equipment, failing to grasp how coinsurance works could lead to unexpected and costly surprises when you file a claim.

​What is Coinsurance? Coinsurance is a clause found in many commercial property insurance policies. It requires you to insure your property for a certain percentage of its total replacement cost—often 80%, 90%, or even 100%. If you don’t meet that threshold, you could face a significant penalty when you file a claim.

Coinsurance Penalties on Buildings Imagine you own a building that would cost $500,000 to rebuild—this is its replacement cost. Your policy has an 80% coinsurance requirement, meaning you need to carry at least $400,000 in coverage to avoid penalties. However, your current policy only insures it for $300,000 because that’s what you paid for it when you bought it. This gap between the required coverage and the insured amount will trigger a coinsurance penalty if you ever file a claim.

How Coinsurance Penalties Are Calculated

Coinsurance Penalty Formula:
Amount You DID Carry ÷ Amount You SHOULD Have Carried = Coinsurance Penalty
In this case:

• $300,000 (amount insured) ÷ $400,000 (required coverage) = 0.75 penalty factor.

Now, suppose there’s a fire and you sustain $200,000 in damages. You might expect your insurance to cover the full amount, but here’s what actually happens:

• Penalty Calculation: 0.75 (penalty factor) × $200,000 (loss) = $150,000 payment from the insurance company.

That’s a $50,000 shortfall—money you’ll have to cover out of pocket. Plus, this amount is still subject to your deductible!

Coinsurance on Construction Equipment
Coinsurance doesn’t just apply to buildings; it can also affect your mobile equipment coverage, such as skid steers or bulldozers. Many contractors undervalue their equipment, insuring it for less than its replacement cost. This can lead to the same kind of penalties if something goes wrong.

For instance, you recently purchased a skid steer that costs $100,000 to replace. Your policy has an 80% coinsurance requirement, so you need to carry at least $80,000 in coverage.

However, your policy only covers it for $70,000 because you bought used. If that skid steer is damaged in an accident and you need $50,000 for repairs, you could face a coinsurance penalty.

Penalty Calculation for Equipment:

•  $70,000 (amount insured) ÷ $80,000 (required coverage) = 0.875 penalty factor.

• Applying the penalty to your $50,000 claim: 0.875 × $50,000 = $43,750 payment from the insurer.

That’s $6,250 you’ll need to cover yourself—plus your deductible. For more information on protecting your equipment, visit our Inland Marine Insurance page.

How to Avoid Coinsurance Penalties
1.     Get an Accurate Valuation: Always insure your buildings and equipment based on their current replacement cost, not what you paid for them.
2.     Review Your Policy Regularly: Construction costs fluctuate, and so does equipment value. Make sure your coverage keeps pace.
3.     Work with a Trusted Agent: At The Granberry Agency, we help you navigate coinsurance clauses and ensure your assets are properly protected.

Final Thoughts Don’t let coinsurance penalties catch you off guard. If you’re unsure whether your current coverage meets your needs, contact us at The Granberry Agency. We’ll help you review your policies, assess your risk, and make sure you’re properly protected.
Visit our website at www.thegranberryagency.com or give us a call at 601-755-2468. Let’s envision solutions together and keep your business safe and secure.
Stay proactive, stay protected, and avoid those unexpected costs!