What is a coinsurance clause in commercial property insurance?

A coinsurance clause is a provision in a commercial property insurance policy that requires the apartment owner to maintain coverage equal to a specified percentage of the building's replacement cost, typically 80%, 90%, or 100%. If the owner insures the property for less than the required percentage and files a claim, the insurer reduces the claim payment proportionally. The coinsurance condition is a standard feature of ISO commercial property forms (CP 00 10 and CP 00 30), which form the basis for most apartment property policies.

The coinsurance penalty formula works as follows: the insurer divides the amount of insurance carried by the amount that should have been carried (the coinsurance percentage times the replacement cost), then multiplies the result by the loss amount. For example, if a building with a $2,000,000 replacement cost is insured for only $1,200,000 under an 80% coinsurance requirement, and a $200,000 loss occurs, the payout would be $1,200,000 divided by $1,600,000 (80% of $2,000,000), multiplied by $200,000, which equals $150,000. The owner would absorb the remaining $50,000.

To avoid coinsurance penalties, apartment owners should obtain accurate replacement cost appraisals and update them regularly. Construction costs can increase significantly year over year, and a building that was adequately insured when the policy was first written may fall below the coinsurance threshold after several years without adjustment. Some policies offer an agreed value option that waives the coinsurance clause, provided the owner submits a statement of values that the insurer accepts. Fannie Mae's Multifamily Selling and Servicing Guide (Part III, Chapter 6) requires either no coinsurance provision or an agreed amount endorsement on DUS-financed properties to prevent policyholders from being penalized on partial losses.