Coinsurance penalty calculator
Enter the numbers from a commercial property claim to see whether the insured met the coinsurance requirement, what the insurer pays, and how much the coinsurance penalty costs. The math follows the ISO Building and Personal Property Coverage Form (CP 00 10).
The coinsurance formula
Payment = (Limit carried ÷ Limit required) × Loss − Deductible, capped at the limit of insurance, where Limit required = Property value × Coinsurance percentage.
If the limit carried is equal to or more than the limit required, there is no penalty and the insurer pays the loss minus the deductible, up to the limit.
Worked example
A building is worth $500,000 with an 80% coinsurance clause, so the owner must carry $400,000. The owner carries $300,000. A fire causes a $100,000 loss and the deductible is $1,000.
- Ratio: $300,000 ÷ $400,000 = 0.7500
- 0.7500 × $100,000 = $75,000
- Minus the deductible: $75,000 − $1,000 = $74,000
Without the penalty the insurer would have paid $99,000, so underinsuring cost the owner $25,000 on this one claim.
Why insurers use coinsurance
Most property losses are partial. Without a coinsurance clause, an owner could insure a building for a fraction of its value, pay a fraction of the premium, and still collect in full on most claims. The clause keeps premiums fair by rewarding owners who insure to value. Adjusters must check the value at the time of loss on every commercial property claim with a coinsurance clause, and it is a guaranteed calculation question on licensing exams.
Frequently asked questions
What is a coinsurance penalty?
A coinsurance clause requires you to insure property for at least a set percentage of its value, usually 80%, 90% or 100%. If the limit you carry is lower than that, the insurer pays only the same proportion of any partial loss. The amount you lose because of that reduction is the coinsurance penalty.
When is the deductible subtracted in the coinsurance formula?
Under the ISO Building and Personal Property Coverage Form (CP 00 10), the coinsurance ratio is applied to the loss first and the deductible is subtracted from the result. The insurer then pays that amount or the limit of insurance, whichever is less.
Is the property value measured when the policy starts or at the time of loss?
At the time of loss. Inflation and improvements can push a property out of compliance during the policy term, which is why many policyholders buy an agreed value option or an inflation guard.
Does coinsurance apply to total losses?
The formula still applies, but in a total loss the result is usually capped by the limit of insurance, so the insurer pays the full limit and the penalty shows up as the gap between the limit and the property value.