Property and business income
What is a coinsurance penalty in commercial property insurance? A reduction in your claim payment that applies when you insured a building for less than the percentage of its replacement cost your policy required.
Most commercial property policies contain a coinsurance clause, usually set at 80, 90, or 100 percent. It is a deal you make with the carrier: you agree to insure the property for at least that share of what it would actually cost to rebuild, and in exchange you get a lower rate. The catch arrives at claim time. If the building was insured for meaningfully less than the required amount, the carrier does not simply pay your limit. It reduces the payment in proportion to how far short you fell, and that reduction is the coinsurance penalty.
The math is unforgiving because it applies to partial losses too, which is where most claims live. Insure a four million dollar building for two million under an eighty percent clause and you have satisfied roughly a third of the requirement, so a partial loss gets paid at roughly that share, minus your deductible. Nobody discovers this while the roof is intact. They discover it while a contractor is waiting on a check.
The prevention is unglamorous and takes one conversation: review your stated values before renewal, especially after construction cost inflation, renovations, or an addition. Values that were accurate three years ago may quietly be creating a penalty today.
Heard on the show. Jessica works through this one in Covered Or Denied: The Hottest Gameshow in Insurance!, with the full story and the transcript.
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This page is education, not advice. Policy language varies by carrier, form, and state, so confirm how your own program is written with a licensed insurance professional.
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