How to Avoid a Coinsurance Penalty on Your Property Insurance Policy

How to Avoid a Coinsurance Penalty on Your Property Insurance PolicyThe word “coinsurance” is often one of the most misunderstood and confusing terms used in the insurance industry. When used in context with property insurance, the word’s meaning differs from when it’s used in context with health insurance.

For the purposes of this blog, we are going to look at coinsurance as it relates to property insurance.

Most property policies, such as a homeowners or commercial property policy, contain a coinsurance clause. Yet, most people tend not to fully understand how this section could impact their coverage.

The International Risk Management Institute defines “coinsurance” as a property insurance provision that penalizes the insured’s loss recovery if the limit of insurance purchased by the insured is not equal to or greater than a specified percentage of the value of the insured property.

Put simply, in the event the amount of property insurance you purchased is inadequate, your insurance company has the right to penalize you by reducing the amount of your claim payment. Typically, the standard amount of coverage that needs to be purchased in order to avoid the penalty is equal to 80% of the replacement value of the property.

For example, a building with a value of $1,000,000 should be insured for at least $800,000 to avoid an 80% coinsurance penalty. If the building was insured for less and a claim were to occur, the insured could end up being paid significantly less than anticipated.

Let’s say the policyholder decides to buy $400,000 of insurance and a $200,000 claim occurs. The claim payment is calculated by dividing the amount of coverage that was purchased ($400,000) by the minimum amount of coverage that should have been purchased ($800,000). This factor (50%) is then multiplied by the amount of the loss ($200,000). The policyholder would receive $100,000 for the claim, minus any applicable deductibles, and then be responsible for paying the rest of the claim out of pocket.

For more information on the coinsurance clause specific to your property insurance policy, contact our licensed representatives at 508-347-6850 or visit us online at

*This article is written for informational purposes only and should not be construed as providing legal advice.