What is coinsurance in property insurance?

What is coinsurance in property insurance? For a small business owner, it can mean the difference between full or partial coverage if you don’t insure the total value of your commercial property. And this can make a big difference if you’re waiting for a claim reimbursement to cover repairs or replacements for your business.

Jump ahead to learn more about:

• What is commercial property insurance coinsurance?
• What’s the purpose of coinsurance?
• What is the coinsurance formula for reimbursement?
• Commercial property insurance coinsurance claim example
• How NEXT helps small business owners with commercial property insurance

What is commercial property insurance coinsurance?

Coinsurance is a clause in a commercial property insurance policy that requires a property to be insured for at least a percentage of its total value — usually 80%-100%.

That means, for a property valued at $1 million, at least $800,000 in coverage is the coinsurance required for full coverage.

The property owner becomes the co-insurer when they decide to insure for less than the required amount. They are agreeing to take on the remainder of the risk. Alternatively, you could purchase a second policy, and the second insurance company becomes the co-insurer.

In addition to property insurance, coinsurance clauses exist in other types of insurance policies as well. You may see them in health insurance to indicate how much  of the bill the primary insurance covers before a co-insurer (usually that’s you) pays the rest.

What’s the purpose of coinsurance?

Policyholders often assume that if they buy $300,000 of commercial property insurance, they get $300,000 worth of coverage. That’s not always the case.

The coinsurance clause stipulates the minimum coverage required to be fully covered. (We’ll break down what coverage looks like below.)

There are three reasons to include a coinsurance clause:

• The insurance companies rely on coinsurance to ensure you have adequate coverage.
• Coinsurance gives policyholders the option to pay less for insurance with a partial policy.
• A coinsurance clause encourages you to get an accurate property assessment – and update it over time.

What is the coinsurance formula for reimbursement?

A coinsurance formula determines the reimbursement you could receive from your insurance company on a commercial property insurance claim. Insurance providers use a formula when you do not have full coverage.

The formula looks like this:

(actual insurance amount / required amount of insurance) x amount of loss – deductible, if applicable = amount of reimbursement

To assess the amount of reimbursement, divide the amount of coverage you have by the policy’s required amount of insurance on your property. Multiply that number by the amount of the loss minus the deductible. The result is how much the insurance company may compensate you in the event of a claim.

Commercial property insurance coinsurance claim example

One of the most common property insurance claims involves direct damage to a building. Let’s do the math.

Let’s say a business owner has property insurance on a commercial building valued at $800,000. For full coverage, the insurance company requires a policy that insures 90% of the value of the building, which would be $720,000. The business owner has a $500,000 commercial property insurance policy. There is no deductible.

After some storm damage, the building has $50,000 worth of damage. Even though the business owner has a $500,000 policy, they will not get the full cost of repairs covered by the insurance company. Here’s how it breaks down with the coinsurance formula:

($500,000 / $720,000) x $50,000  = $34,722.22

Based on the formula, the insurance company might pay $34,722.22 for the claim. The business owner is responsible for the remainder — $15,277.78.

How NEXT helps small business owners with commercial property insurance

NEXT makes it fast, easy and affordable to get commercial property insurance to help protect your business.

We’ll ask a few questions about your business and give you a quote. You can select your coverage options and purchase your policy — all in about 10 minutes. Your certificate of insurance will be available immediately, and you can access your policy 24/7 via web or mobile app.

Start a free quote with NEXT.