The Coinsurance Clause in Property Insurance Policies
- Rabih Hamawi
- May 16
- 4 min read
By Rabih Hamawi, CPCU®, CIC, CRM, LIC, MSF
© 2025 Rabih Hamawi
Earlier this year, an attorney referred to me a case involving fire damage to a restaurant after the referring attorney couldn’t get the claim paid without litigation. The fire had destroyed the building and business personal property of the referring attorney’s client.
After receiving and reviewing the entire file that the referring attorney sent me, including some of the emails between the referring attorney and the insurer’s adjuster regarding the applicability of the coinsurance clause, I quickly determined that they had both misunderstood the coinsurance clause in the operative policy, so I decided to write this article.
I. What Is Coinsurance And Why Are Insurers Concerned With It?
Coinsurance is a condition that may be found in more than one type of policy, like commercial property, dwelling, homeowners, federal flood, health insurance, and at times, even directors and officers liability policies. But for now, I will keep it simple and will only focus on its applicability in property insurance policies.
Practically, coinsurance is a rating and underwriting concept that insurers use to encourage insureds to purchase an amount of insurance equal to the full value of the property being insured. Unfortunately, most policyholders are not even aware of the existence of a coinsurance clause in their policies, or how it applies, until after a loss occurs.¹
Whether a policy includes a coinsurance clause is usually reflected in the Declarations Page. Here is an example from a commercial property policy:
Coinsurance requires the Named Insured to carry a certain percentage, often 80%, 90%, or 100%, of the property’s total insurable value (TIV). The TIV is determined at the time of loss.
When insurance is carried in the amount required by the coinsurance percentage, the insurance company pays the entire loss, not to exceed the limit of insurance. Thus, if the limit of insurance is adequate to comply with this provision, no penalty applies. If the amount carried is less than the amount required, then the Named Insured is considered underinsured, and a penalty may apply.
For example, a property valued at $250,000 at the time of a loss with an 80% coinsurance requirement would need to have a limit of insurance of at least $200,000 to be in compliance with the coinsurance clause.² It is important to anticipate what the TIV of the property will be 12 months in the future, because the coinsurance penalty will be calculated at the time of the loss. This means that if the limit of insurance is calculated based on the value of the property at the policy inspection date, the Named Insured could face a coinsurance penalty if the value has increased by the time of the loss.
II. The Coinsurance Clause Formula And How It Works In Real Life
The following formula is used to determine the loss settlement amount for a property subject to the coinsurance provision. This is better understood as Did/Should x Loss:
The following example illustrates how the formula is applied.
The settlement is $4,000. In other words, because the Named Insured carried a limit of insurance that was 50% of what was required, the Named Insured was penalized; incurred a coinsurance penalty; and only 50% of the $10,000 loss is paid minus any existing deductible ($1,000 in this case). Had the Named Insured carried the required amount of insurance— in this case, $80,000—it would have received a settlement of $9,000 (the full $10,000 loss amount minus a $1,000 deductible) as opposed to the $4,000 that it eventually received with a limit of insurance of only $40,000.
III. How to get around the coinsurance clause—Agreed Value
A Named Insured may resolve any uncertainty associated with the insured property’s TIV, and the coinsurance clause penalty, by simply requesting an endorsement (change) to the policy called an Agreed Value endorsement.
Agreed Value suspends the coinsurance clause and ensures full payment for a covered loss up to a pre-agreed value determined when the policy is issued, instead of at the time of loss. Activation of this optional coverage, and endorsing the policy, indicates the underwriter and the Named Insured agree that an adequate limit of insurance is being carried for underwriting eligibility, and as such, the coinsurance provision can be suspended for a time. The Agreed Value option usually has an expiration date and will not last longer than the policy’s initial term—usually 12 months. This expiration date means that the coinsurance provision is not waived or removed entirely but rather suspended for a period of time—in this case, up to 12 months. If the Named Insured reduces the limit of insurance during the policy period to an amount below the agreed value, the coinsurance provision will be reinstated.
Similarly, if the policy is renewed beyond the initial 12-month term, it is likely that the Agreed Value endorsement will be removed from future policy renewals unless specifically requested from the insurer, which usually requires an increase in the amount of the insurance limits agreed upon and additional premium.
This is it for now. In future articles, I will discuss the coinsurance clause when dealing with a business income claim.
Endnotes
For homeowners policies, this provision is often found in “Section I – Conditions; D. Loss Settlement; 2. B.” For commercial property, this provision is often found in “Additional Conditions: 1. Coinsurance.” For Business Owners Policies, this provision is often found in “E. Property Conditions: 5. Loss Payment: d.(1)(b).”
Industry studies have shown that as many as 75% of commercial buildings are underinsured. Kevin Kuntz and Elizabeth Casas Leano, “Three attributes of commercial properties that underwriters shouldn’t take for granted,” Versik, August 20, 2020, https://www.verisk.com/insurance/visualize/three-attributes-of-commercial-properties-that-underwriters-shouldnt-take-for-granted/
If your insurance company has denied, delayed, or underpaid your insurance claim, contact Law Office of Rabih Hamawi for a case evaluation at (248) 905-1133 or www.hamawilaw.com.
Who is Rabih Hamawi?
Attorney & Counselor
Rabih Hamawi is a principal at the Law Office of Rabih Hamawi, P.C. and focuses his practice on representing policyholders in fire, property damage, and insurance-coverage disputes against insurance companies and in errors-and-omissions cases against insurance agents. He may be reached at (248) 905-1133.
