🏢 The "Savvy" Businessman's Mistake
Meet Bob. Bob owns a warehouse worth $1,000,000.
Bob thinks: "It's unlikely the whole building will burn down. I'll just insure it for $500,000 to save money on premiums."
A month later, a small fire causes $100,000 in damage. Bob is calm. He has $500,000 in coverage, so the $100,000 claim should be fully covered, right?
WRONG. The insurance company writes him a check for only $50,000. Bob has to pay the other $50,000 out of pocket. Why? Because he triggered the dreaded Coinsurance Penalty.
Most business owners treat insurance limits like a "bank account"—if I have $500k in the account, I can withdraw up to $500k.
But Commercial Property Insurance works differently. It includes a "Coinsurance Clause" (usually 80%, 90%, or 100%). This clause demands that you insure your property for a certain percentage of its full replacement cost. If you cheat on the value, they cheat on the payout.
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| Insured Your Building for $500k but It's Worth $1M? |
The Brutal Math. "Did / Should x Loss"
Adjusters use a specific formula to calculate your penalty. You need to memorize this.
(Did ÷ Should) × Loss = Payout
(Amount You DID Carry) ÷ (Amount You SHOULD Have Carried) × Claim Amount
Let's go back to Bob's Warehouse disaster to see how this destroyed his finances.
The Trap: Even though Bob had $400,000 in total coverage and his loss was only $100,000, he still got penalized. The penalty applies to every single claim, no matter how small.
Why Does This Clause Exist?
Insurance works on the "Law of Large Numbers." If everyone underinsured their buildings, the insurance company wouldn't collect enough premiums to pay for the few total losses that happen.
The Coinsurance Clause is their way of forcing you to be honest about your property's value. If you pay a full premium, you get a full payout. If you pay a half premium, you get a half payout.
The Silent Killer in 2026
Maybe you didn't mean to cheat. Maybe you bought the building 10 years ago for $500,000 and just kept renewing the policy at the same amount.
But construction costs have doubled since 2020.
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⚠️ Scenario
Your building would cost $1M to rebuild today due to soaring labor and material costs. Your policy limit is still $500k. You are inadvertently underinsured by 50%. If a storm rips off your roof tomorrow, the coinsurance penalty will trigger, and you will only get paid half the cost of the repair.
How to Escape the Penalty (Agreed Value)
There is a "Cheat Code" to avoid this mess entirely. It is an endorsement called "Agreed Value."
✅ The Agreed Value Endorsement
This suspends the Coinsurance clause.
1. You and the insurance company agree upfront that the building is worth $1M.
2. You submit a "Statement of Values" (SOV) signed by an appraiser.
3. The insurer stamps "Agreed Value" on your policy declarations page.
The Result: If you have a loss, there is no math formula. No penalty. They just pay the claim (up to the limit). Always ask your broker for this.
🛡️ Chief Editor’s Verdict
Check your policy TODAY. Look for the section "Coinsurance: 80%" (or 90%).
- Get an Appraisal: Don't guess your building's value. Pay a professional to calculate the current "Replacement Cost," not the "Market Value."
- Update Limits: If your limit is less than 80% of that appraisal, call your broker immediately to raise it.
- Demand Agreed Value: If you qualify, switch your policy to "Agreed Value" to sleep better at night.
Saving $500 on premiums could cost you $500,000 in a claim. Don't be like Bob.
This article provides general information about commercial property insurance and coinsurance clauses. It is not legal or professional insurance advice. Policy terms, conditions, and exclusions vary by carrier and state (e.g., Valued Policy States like FL, TX). Replacement cost estimates should be determined by a qualified appraiser. Always consult with a licensed insurance broker or attorney to review your specific coverage needs.
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