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Co-Insurance Explained: The Hidden Cost of Underinsuring Your Property

May 23, 2024 2:00:00 PM

Co-insurance remains one of the most perplexing concepts in insurance, often leaving policyholders puzzled about its implications. In this article, we aim to demystify co-insurance by shedding light on what it entails and how it works.

What is Co-Insurance on Commercial Insurance?

In short, co-insurance acts as a penalty for underinsuring your property. It can cause you to not receive a full replacement cost value of your property in the event of a loss. 

Co-insurance is a provision that insurance companies use in policies that cover property (buildings, contents, stock, or industrial equipment). It exists to ensure that policyholders insure their property to reflect its true value, allowing insurers to receive a fair premium for the associated risks. This applies to both replacement cost and actual cash value (subject to depreciation). Business interruption policies may also incorporate a co-insurance clause to ensure that revenue streams are appropriately insured.


How Does Co-Insurance Work?

Co-insurance is usually expressed as a percentage. Insurance providers require policyholders to insure their property to a certain level of its true value, commonly set at 80%, 90%, or 100%. For example, a building with a replacement value of $1,000,000 and a co-insurance clause of 90% must be insured for no less than $900,000 to receive no co-insurance penalty.

Choosing to insure for less than the required amount subjects the property owner to a co-insurance penalty. In the event of a claim, the co-insurance formula determines the amount of coverage that would actually be paid out during a claim. This penalty serves as a deterrent to underinsuring and incentivizes policyholders to accurately insure the value of their assets.


What is the Co-Insurance Formula?


Co-Insurance Calculation Examples

Scenario 1 (Underinsured)

  • Building Value: $1,000,000
  • Co-insurance Requirement: 90%
  • Required Amount of Insurance: $900,000
  • Amount of Insurance Purchased: $600,000
  • Amount of Loss: $300,000
  • Co-insurance Penalty: $100,000
  • Estimated Insurance Payout: $200,000

Scenario 2 (Fully Insured)

  • Building Value: $1,000,000
  • Co-insurance Requirement: 90%
  • Required Amount of Insurance: $900,000
  • Actual Amount of Insurance: $900,000
  • Amount of Loss: $300,000
  • Co-Insurance Penalty: $0
  • Estimated Insurance Payout: $300,000

No Co-insurance Penalty (Owner meets the requirement, and the claim is paid without penalty)

If you need help with a co-insurance calculation, we have a co-insurance calculator tool.

Deletion of Co-Insurance Clause

Insurers typically resist deleting the co-insurance clause to ensure fair premiums and coverage. However, under certain circumstances, a "stated amount co-insurance" clause may replace the percentage requirement. This involves pre-agreeing on a value, and as long as the property is insured for at least that amount, the policyholder avoids co-insurance penalties.

Co-Insurance Percentages and Applications

Different co-insurance percentages are applicable to various scenarios. For instance, 80% may be used for actual cash value, stock in trade, and gross earnings business interruption. Meanwhile, 90% is often employed for the replacement cost of buildings, contents, and industrial equipment, and 100% for profits business interruption. Specific percentages may vary by policy, region, and other risk factors; consult your broker or agent for clarification on your coverages.


Policies Featuring Co-Insurance Clauses

Co-insurance clauses are predominantly found in commercial insurance policies, particularly in commercial property insurance. These policies may require different percentages, and some may even allow policyholders to suspend the co-insurance clause by adding a stated amount endorsement.


In conclusion, understanding co-insurance is crucial for property owners to ensure they are adequately covered and to avoid potential financial penalties in the event of a claim. Understanding the complexity of property insurance and co-insurance is important for getting the coverage you need. The experts of Armour Insurance are here to help. Our commercial insurance team can help you get the coverage you need at the price you deserve. Give us a call, we're here to help. 

Call us 1-855-475-0959

Jake McCoy

Written by Jake McCoy


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