noun
coinsurance
In plain English
A clause that penalizes you on a claim if you've underinsured the property.
If your policy says 80% coinsurance, you have to insure the building for at least 80% of its actual replacement cost. If you don't, every claim is reduced by the same ratio you fell short.
What it covers
Nothing — coinsurance isn't coverage, it's a penalty mechanism the insurer uses to encourage you to insure to value.
What it does not cover
Don't confuse with a deductible. Coinsurance is calculated as a ratio across the whole loss; the deductible is a flat amount off the top.
Where it trips people up
It's silent until you have a partial loss. Total losses don't trigger it (you just collect the limit). It's the partial losses where you find out you were underinsured.
The technical version
A condition in property insurance requiring the insured to maintain coverage equal to a stated percentage of the property's value; failure to do so results in a proportional reduction of the loss payment.
Worked example
A warehouse worth $1M is insured for $600K, with 80% coinsurance.
- Required limit
- 80% × $1M = $800K
- Actual limit
- $600K (75% of required)
- Fire damage
- $200K partial loss
- Coinsurance penalty
- $600K ÷ $800K = 75% of the loss covered
The result. the insurer pays $150K (75% of the $200K loss), not $200K. The owner eats $50K because they were underinsured. Total losses still pay the full $600K limit — coinsurance only bites on partials.