How does coinsurance affect my building insurance?

A coinsurance clause is a common clause in many policy forms that requires an insured to purchase a minimum amount of insurance based on a percentage of the values insured if one wishes to receive a full payout in the event of a partial loss. To calculate coinsurance, divide the amount of insurance carried (“DID”) from the amount of insurance required (“SHOULD”) and multiply the result by the loss amount: Payout = (DID / SHOULD) x Loss Amount.

A coinsurance requirement can affect your building insurance in 2 major ways:

First, it could reduce the payout in the event of a loss. Let’s say Darren owns a building valued at $1,000,000 with a coinsurance requirement of 80%. In this case, he should insure it for $800,000. If, however, Darren only bought an amount of insurance of $400,000 and had a loss valued at $100,000, the insurer would only pay out: ($400,000 / $800,000) x $100,000 = $50,000. As you can see, the payout was reduced by half because Darren only bought half of the insurance limit he should have.

Second, the forces of inflation could cause trouble for a policyholder subject to a coinsurance clause. If you are a large property owner, it is not hard to imagine that inflation could quickly push your values up to the point where you would be violating your coinsurance requirement. If this is a concern, you should explore insuring your buildings on a Stated Amount basis.

It’s important to note that the coinsurance penalty does not apply to total losses or losses valued below 2% of amount of insurance or $5,000 (whichever is lesser). This is called a Waiver of Coinsurance.