Co-Insurance
A co-insurance clause requires the property owner to insure the building for at least a specified percentage of its replacement cost, typically 80%, or face reduced claim payouts.
Co-insurance is a contractual provision in most commercial property policies that penalizes property owners who underinsure their buildings. (Source: ISO Form CP 00 30, Commercial Property Conditions) The clause specifies a minimum percentage, usually 80%, 90%, or 100%, of the building's replacement cost that must be carried as the coverage limit. If the owner insures for less than this threshold, the insurer applies a proportional reduction to every claim, including partial losses.
The co-insurance penalty formula divides the amount of insurance actually carried by the amount that should have been carried (replacement cost multiplied by the co-insurance percentage), then multiplies the result by the loss amount. For example, with an 80% co-insurance clause on a building worth $10,000,000, the owner should carry at least $8,000,000 in coverage. If only $6,000,000 is carried, the owner is insuring 75% of the required amount, and every claim is paid at 75 cents on the dollar.
The most effective protection against co-insurance penalties is maintaining accurate, current replacement cost valuations. An agreed amount endorsement can also waive the co-insurance clause entirely in exchange for a signed statement of values. This endorsement is widely available and strongly recommended for apartment properties where construction costs are volatile and the risk of inadvertent underinsurance is high.