Find out exactly how much your insurance company will pay after a loss — and how much of the bill you'll be stuck with if you're underinsured.
Most commercial property insurance policies include a coinsurance clause — a requirement that you insure your building or business property for at least a set percentage of its full replacement cost, typically 80%, 90%, or 100%. If your coverage falls below that threshold, your insurer doesn't just pay less on a total loss. They apply a penalty formula to every claim, including small partial losses, reducing your payout proportionally to how underinsured you are.
This catches business owners off guard constantly. You might assume that carrying $600,000 in coverage on a $1,000,000 building means you're covered for 60% of any loss. In reality, if your policy requires 80% coinsurance, you're only carrying 75% of the required amount — and your insurer will only pay 75% of your claim, no matter how small the damage is.
Coinsurance clauses exist to discourage business owners from underinsuring property to save on premiums while still expecting full claim payouts. It keeps premiums fair across all policyholders.
Insure your property to at least the required percentage of its true replacement cost, or ask your agent about an Agreed Value endorsement, which waives the coinsurance clause entirely.