The co-insurance clause is a common and often misunderstood part of property insurance policies.

In effect, the insurance company agrees to reduce the premium on a policy if you (the property owner) will carry insurance equal to a specific percentage of the property’s true value (usually 80% to 90%). As the property owner, you assume the responsibility of maintaining the required amount of insurance at all times.

In accepting the reduced rate, you are subject to a penalty if you do not insure up to the percentage specified in the co-insurance clause. In the event of a claim, you become a “co-insurer” and share in the loss by having your payment reduced. The following example offers some clarification:

In a typical 80% co-insurance situation:

If the replacement cost value of the property is $1,000,000, the minimum amount of insurance that must be carried is $800,000. Now, assume you actually carry only $600,000 in insurance and you suffer a loss in that amount:

Since the amount recoverable is only $450,000, you (the “co-insurer”) are responsible for the $150,000 shortfall.

Had you insured up to the required $800,000, no penalty would have applied and you would have recovered your loss in full.

To ensure that proper limits are in place, it is important to get a professional appraisal which will take into consideration all the required elements that a replacement cost policy wording encompasses. Frequent changes in building materials, labour and items such as by-laws or demolition and salvage costs need to be included in the value which the professional appraiser can determine.

Please find a link here to our Commercial Building Cost Calculator page with further details and information.