The Coinsurance Clause Explained: The Penalty Formula, With Examples

Coinsurance is one of the most-tested ideas on property exams and one of the most expensive surprises in real claims. The idea is simple: the policy asks you to insure the property to a stated share of its value, and if you carry less, a partial loss is paid at a reduced rate.

Quick answer: Required insurance = the property's value × the coinsurance percentage. If the amount you carry is less than the amount required, the claim is paid at the ratio carried ÷ required, then the deductible comes off. If you carry at least the required amount, there is no penalty.

What coinsurance means (and what it does not)

In property insurance, a coinsurance clause is an agreement to keep insurance on the property equal to a stated percentage of its value. One insurer glossary describes it as a requirement to maintain coverage at a stipulated percentage of total value or suffer a penalty in proportion to the deficiency. The Utah Insurance Department's glossary describes it as an agreement to carry insurance equal to a certain percentage of the property's actual cash value.

The same word means something else in health insurance. The Tennessee Department of Commerce & Insurance glossary uses it for the percentage of each health care bill a person pays. This article is about the property meaning.

The formula

Maine's consumer guide for businesses lays the method out in this order, as we read it:

1. Required amount = value of the property × coinsurance percentage.
2. Ratio = amount carried ÷ amount required (capped at 1, since carrying more than required does not raise the payment above the loss).
3. Payment = ratio × the loss, minus the deductible.

Which value counts, replacement cost or actual cash value, is set by the policy, and the two sources above differ on it, so read the clause in the policy you are looking at. The examples below use replacement cost.

Example 1: no penalty

The building would cost $250,000 to replace. The policy has an 80 percent coinsurance clause and $200,000 of coverage. A fire causes a $40,000 loss, and the deductible is $500.

Required = $250,000 × 0.80 = $200,000. Carried = $200,000, so the ratio is 1.00. Payment = $40,000 − $500 = $39,500. As we read the Maine guide, its adequate-insurance example uses these same figures.

Example 2: a penalty (our illustration)

Same building and same 80 percent clause, but the owner carries only $150,000. The loss is again $40,000, and the deductible is $500.

Required = $200,000. Ratio = $150,000 ÷ $200,000 = 0.75. Payment = 0.75 × $40,000 = $30,000, minus $500 = $29,500. The owner absorbs the rest of the loss. Shortchanging coverage by 25 percent cost the owner $10,000 on this one claim, on top of the deductible.

Common exam traps

• Partial vs. total loss. The penalty reduces what is paid, but payment can never exceed the limit of insurance.
• Deductible last. Apply the ratio to the loss first, then subtract the deductible.
• The required amount is not the limit. Coinsurance sets the minimum you must carry, not the maximum the policy pays.
• Look at the percentage. 80, 90 and 100 percent clauses all exist.

Why it matters to an adjuster

When a property claim is partial, one of the first checks is whether the amount of insurance meets the clause. Get the value basis and the percentage from the policy, not from memory, and show the arithmetic in the file so the insured can follow it.

Try it on real exam questions

Every state's exam is different, and the best way to learn these calculations is to practice them. Take 20 free practice questions for your state, scored instantly with explanations: Alabama, Alaska, Arizona, Delaware, District of Columbia, Hawaii, Idaho, Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, Wyoming.

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Related reading

• Insurance Exam Math: The Formulas You Need, With Worked Examples
• Actual Cash Value vs. Replacement Cost: What Each One Pays
• How Insurance Deductibles Work: Flat, Percentage and Hurricane Deductibles
• Why Do People Fail the Insurance License Exam?