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Demystifying Business Coinsurance

Reasons Insurance

Protecting Your Assets

A coinsurance clause is an essential component of a commercial property insurance policy, ensuring that you have adequate coverage to protect your business assets in the event of a loss. It’s a crucial element that often gets overlooked in the fine print of insurance policies, but understanding its implications is vital for safeguarding your business.

Understanding Coinsurance

Coinsurance is a cost-sharing arrangement between you, the policyholder, and the insurance company. It mandates that you maintain a certain level of insurance coverage relative to the value of your insured property. For instance, if your office building is valued at $1,000,000 and your policy has a coinsurance clause of 80%, you are required to have at least $800,000 in coverage.

The Implications of Being Underinsured

Let’s assume you only insure your office building for $600,000 to save money. This decision may seem like a cost-saving measure, but it can have significant repercussions in the event of a claim.

Imagine a fire breaks out, causing $50,000 worth of damage to your office building. You file a claim, expecting your insurance policy to cover the entire amount. However, due to the coinsurance clause, you’ll face a penalty.

The penalty is calculated by comparing the amount of coverage you carried to the required amount. In this case, you carried $600,000 in coverage, while the required amount was $800,000. This means you were only 0.75 compliant with the coinsurance clause.

As a result, you will receive a final payout of only 0.75 times the $49,000 pre-penalty amount, which is $36,750. This means you’ll have to pay $12,250 out of pocket for the remaining damages.

The Significance of Coinsurance

Coinsurance clauses may seem like a way for insurance companies to avoid paying out full claims, but they serve a crucial purpose. They ensure that policyholders maintain adequate coverage to protect their assets. This, in turn, collects appropriate premium from all clients for the risk they are looking to protect. When a loss occurs, you want the peace of mind knowing that your insurance will cover the majority of the expenses.

Benefits of Adequate Coverage

  1. Financial Protection: Adequate insurance coverage shields your business from the financial burden of property damage or loss.
  2. Business Continuity: Comprehensive coverage ensures that your business can continue operations in the aftermath of a loss.
  3. Peace of Mind: Knowing your business is well-protected provides peace of mind and allows you to focus on running your business.


Coinsurance plays a vital role in ensuring that businesses have the financial protection they need to weather unexpected losses. By understanding coinsurance and maintaining adequate coverage, you can safeguard your assets and maintain business continuity.

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