Hey guys, David here. One thing that confused me early on as a property manager in New York was coinsurance. It’s one of those insurance terms you see buried in the policy, but if you don’t fully understand it, you could get hit with a big penalty when filing a claim. So I asked my broker: how does coinsurance work on a property policy, and how can I avoid getting penalized?
Here’s what I learned.
Coinsurance is basically an agreement between you and the insurance company that says you’ll insure your building for at least a certain percentage of its replacement value—usually 80%, 90%, or 100%. If you don’t carry that amount of coverage, the insurance company can reduce your claim payment when a loss happens.
Let me give you an example. Say your building’s replacement cost is $1,000,000, and your policy has an 80% coinsurance clause. That means you need to carry at least $800,000 in coverage. But if you only insured the building for $500,000, you’re underinsured. So if there’s a fire that causes $100,000 in damage, the carrier won’t just hand you $100,000. They’ll apply the coinsurance penalty and pay you less, sometimes a lot less.
The math can be tricky, but the bottom line is simple: if you don’t insure your property to the required percentage, you’re sharing part of the loss out of your own pocket.
So how do you avoid penalties?
Know your building’s true replacement cost (not market value, but what it would cost to rebuild).
Review your policy’s coinsurance percentage and make sure your coverage amount lines up.
Update values regularly. Construction costs in New York go up all the time, and what was enough coverage last year may not be enough today.
Talk to your broker about an agreed value endorsement, which can sometimes waive the coinsurance requirement if you and the insurer agree on a set property value.
At the end of the day, coinsurance isn’t meant to trick you—it’s just the insurer’s way of making sure buildings are insured properly. But if you don’t keep up with it, the penalty can be a nasty surprise when you need coverage the most.
If you want to make sure your properties are insured correctly and avoid coinsurance penalties, give us a call at 516-277-0812 or request a review online: Request a Quote Here.