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?
• How does coinsurance work?
• Coinsurance vs. copay vs. deductibles: What’s the difference?
• What’s the purpose of coinsurance?
• How NEXT helps small business owners protect their property

What is coinsurance in commercial property insurance?

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.

If a property owner doesn’t have enough commercial property insurance on their business property, they could face a harsh financial penalty in the event they make a claim.

In healthcare, the meaning of coinsurance is different. It’s a percentage of costs that you, the insured person, are responsible for paying. For example, if your coinsurance is 20%, you’ll pay 20% of the cost of a covered medical service, and your insurance carrier will cover the remaining 80%.

In some rare cases, coinsurance can also mean when more than one insurance company jointly covers a person or business. Most of the time, however, it’s the definitions above.

How does coinsurance work?

A coinsurance clause in a commercial property insurance policy helps ensure you carry enough coverage to protect your possessions in case of an unexpected event.

Example of coinsurance in commercial property insurance

Say your office building’s total value is $1,000,000. You buy a commercial property insurance policy with a coinsurance clause of 80%. That means you, the property owner, should insure the building for at least $800,000.

Policy scenario #1 (properly insured based on coinsurance clause):

• Deductible: $1,000
• Policy limit: $800,000
• Coinsurance: 80%

Let’s say a fire causes $50,000 worth of property damage, and you make a claim.

A claim settlement could be:

• You pay the $1,000 deductible
• Your insurance company covers the remaining $49,000 since your property is insured for 80% of its property value.

But, maybe to save money on your monthly premium you only buy $600,000 worth of coverage. Your insurer can penalize you when you file a claim by not paying out the full amount of your damages — even if they’re under your insurance coverage limits.

Policy scenario #2 (underinsured):

• Deductible: $1,000
• Policy limit: $600,000
• Coinsurance: 80%

The fire causes $50,000 worth of property damage, and you make a claim. But when you get your payout, you’re surprised to see your insurer only paid out $36,750. What happened?

The claim settlement could be:

• You pay the $1,000 deductible
• Your insurance company penalizes you for not insuring your property to at least 80% of its property value. After the coinsurance penalty, they cover $36,750.

According to the coinsurance clause in your commercial property insurance, you were supposed to have at least $800,000 in coverage. You were penalized because you failed to meet your coinsurance percentage of 80%.

Penalties vary but are often determined by a simple ratio: the amount you carried divided by the required amount. 

Here’s the math on how a coinsurance penalty can be calculated:

• Initial payout: $50,000 in damage – $1,000 deductible = $49,000 payout pre-penalty
• Penalty: $600,000 coverage carried / $800,000 coverage required = 0.75.
• Payout after penalty: 0.75 x $49,000 = $36,750 final payout

Because your property insurance coverage didn’t meet the 80% coinsurance clause in this scenario, you’d have to pay $12,250 out-of-pocket for damages. Ugh.

Coinsurance vs. copay vs. deductibles: What’s the difference?

Here’s how these terms are defined in small business insurance:

• Coinsurance – A clause that requires the policyholder to insure their property to a certain percentage of its value, typically 80-90%.
• Deductible – The amount the policyholder must pay out-of-pocket before the insurance company covers a claim.
• Copay – A fixed amount (flat fee) policyholders pay for a specific service, usually at the time of the service. Copays are specific to health insurance policies.
• Policy limits – (also called coverage limits). The maximum amount an insurance company will pay for a covered loss.
• Premium – The regular payment made to the insurance company to keep the policy active.

In business insurance, the policyholder must pay the deductible out-of-pocket maximum before their insurer kicks in and covers an insurance claim. After meeting the annual deductible, the insurance carrier pays the remaining loss amount, considering the coinsurance requirement. 

If the policyholder is underinsured, they will face a penalty and must pay a percentage of the claim out of pocket.

What’s the purpose of coinsurance?

You may feel like a coinsurance clause is just a sneaky way for insurance providers to avoid paying for full damages. But coinsurance is a type of cost-sharing mechanism that helps businesses manage risk and share the financial burden of losses with their insurance company.

Coinsurance provisions in business insurance encourage policyholders to insure their business property to its full value. 

Their reasons for coinsurance are:

1. Risk sharing: Coinsurance ensures policyholders share a portion of the risk by maintaining adequate coverage.
2. Prevent underinsurance: The practice discourages policyholders from underinsuring their property to reduce premium costs, which can lead to insufficient funds for full recovery after a loss.
3. Fair premium calculation: Coinsurance promotes equitable premium payments, as insurers base premiums on the actual value at risk.
4. Adequate compensation: Sharing in the risk helps ensure sufficient funds are available to cover substantial losses and facilitate quicker and more complete recovery for the policyholder.

Insurance’s main benefit is transferring your risk to an insurance company in exchange for paying a premium. Buying the right amount of coverage benefits you in the long term.

How NEXT helps small business owners protect their property

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.