Coinsurance

What the clause does

Coinsurance does not add coverage. It takes coverage away if the association bought less than the policy requires. The idea is that an insurer prices a policy assuming the association is carrying a limit close to the property's real value; if the association buys a lower limit to save on premium, the coinsurance clause claws back part of every claim, not only a total loss.

"A property insurance provision that penalizes the insured's loss recovery if the limit of insurance purchased by the insured is not equal to or greater than a specified percentage (commonly 80 percent) of the value of the insured property."

Source: Coinsurance Provision, IRMI Glossary of Insurance and Risk Management Terms

How the penalty is calculated

The formula compares the coverage the association actually bought to the coverage the coinsurance percentage required, multiplies that ratio by the loss, then subtracts the deductible.

"the insured will recover no more than the following: the amount of the loss multiplied by the ratio of the amount of insurance purchased (the limit of insurance) to the amount of insurance required (the value of the property on the date of loss multiplied by the coinsurance percentage), less the deductible."

Source: Coinsurance Provision, IRMI Glossary of Insurance and Risk Management Terms

Worked example: a building appraised at $1,000,000 carries an 80 percent coinsurance clause, so the policy requires $800,000 of coverage. The association only carries $500,000. A fire causes $100,000 in damage. The payout is $100,000 multiplied by ($500,000 ÷ $800,000), or $62,500, before the deductible is subtracted. Carrying the full $800,000 would have paid the loss in full.

Getting the value right

The whole clause turns on one number: the property's current value. Whether your state requires a periodic independent appraisal to establish that value, and what your own policy's coinsurance percentage is, vary by state and by policy. Florida condominiums are a documented example of a state going further than most:

"The replacement cost must be determined at least once every 3 years, at minimum."

Source: Florida Statutes §718.111(11)(a), The Florida Senate

Whatever your state requires, the board's job is the same: get a current valuation before renewal, not after a loss. Industry guidance recommends giving the broker specific data (valuation, capital improvements, occupancy, amenities, and loss history) and keeping several years of records, because a thin submission produces a worse quote and a worse sense of what the property is actually worth.