Coinsurance Clause
A standard commercial property policy provision requiring the owner to insure their building to at least a set percentage of its value, commonly 80 or 90 percent. If they carry less, the claim payout gets reduced proportionally, regardless of the policy's stated coverage limit.
Why it matters
Coinsurance is one of the most misunderstood clauses in property insurance, according to the industry's own trade press, because the penalty isn't capped at the shortfall, it applies to the entire claim, even a small one, once the building is found to be underinsured relative to its actual value.
On a real project
A $100,000 building carries a 90 percent coinsurance requirement, meaning $90,000 of coverage is required. The owner only carries $45,000, half of what's required. After a $20,000 repair claim, the payout is cut in half to $10,000 before the deductible, since the owner only met half the coinsurance requirement.
Who this matters most to
A Builder's Risk Underwriter sets and enforces the coinsurance percentage when writing a policy, deciding how much penalty risk an underinsured owner is taking on. A Insurance Adjuster runs the actual coinsurance formula against the property's real value when a claim comes in.
Where this goes wrong
A warehouse owner insures a $500,000 building for $300,000, assuming that's close enough, without realizing the policy carries a 90 percent coinsurance requirement, a $450,000 minimum. After a $50,000 fire, the coinsurance penalty cuts the payout to roughly $33,000, a gap the owner only discovers after the loss, when it's too late to fix.