Coinsurance and the Underinsurance Penalty
A coinsurance clause quietly penalizes you for under-insuring — even on a partial loss you fully expected to be covered.
Last reviewed: May 26, 2026 by the BizLeaseCheck Editorial Team
General information, not insurance or legal advice.
Overview
A property coinsurance clause requires you to insure the property to a stated percentage of its value (often 80%, 90%, or 100%). If you insure for less, the insurer applies a penalty that reduces what it pays on a claim.
The trap is that the penalty applies even to partial losses, so a building insured below the required percentage can see a covered claim cut by the coinsurance penalty.
Topics to check
At the time of loss, the insurer compares the amount of insurance you carried to the amount required by the coinsurance percentage. If you carried less, the claim payment is reduced in proportion (roughly: amount carried ÷ amount required), minus the deductible.
Because property values rise over time, a policy that met the coinsurance requirement at purchase can fall short later if the limit is not updated.
Coinsurance (Cornell LII Wex)Insure the property to the required percentage of its current value, review the limit as values rise, and consider an agreed-value endorsement, which suspends the coinsurance penalty when the insurer agrees the limit is adequate.
Replacement-cost vs actual-cash-value valuation also affects the math, so review them together.
Replacement value (Cornell LII Wex)Find the coinsurance percentage, confirm your limit meets it against current value, and ask a licensed agent or broker about an agreed-value endorsement to remove the penalty risk.
The exact penalty calculation and any agreed-value option depend on the policy form; confirm them with a licensed producer.
Key takeaways
- Coinsurance requires insuring to a set percentage of value (often 80–100%).
- Insuring below it triggers a penalty that reduces even partial-loss payments.
- Rising property values can push a once-compliant policy below the requirement.
- An agreed-value endorsement can suspend the coinsurance penalty.
- Review coinsurance together with replacement-cost vs ACV valuation.
Official resources
Coverage-review notes
Guide confidence marker: Confirm with a licensed agent or broker.
- The coinsurance calculation and agreed-value options depend on the policy form.
- Confirm your limit, coinsurance percentage, and valuation with a licensed agent or broker.
- This guide is general information from the BizLeaseCheck Editorial Team. It is not insurance advice or a coverage opinion; confirm coverage with a licensed agent or broker.
Frequently asked questions
What is a coinsurance penalty?
It is a reduction in a property claim payment applied when you insured the property for less than the coinsurance clause requires. The insurer pays roughly the proportion of the loss equal to the amount you carried divided by the amount required.
How do I avoid a coinsurance penalty?
Insure to the required percentage of current value, keep the limit updated as values rise, and consider an agreed-value endorsement that suspends the penalty. Confirm the approach with a licensed agent or broker.
Is this insurance or legal advice?
No. This is general, educational information to help you read your own policy — it is not insurance advice, a coverage opinion, or legal advice. Coverage depends on the exact policy form, endorsements, declarations, and state law, so confirm what a policy covers (and whether the limits are adequate) with a licensed insurance agent or broker, and read the actual policy.