Coinsurance penalty calculator
A coinsurance condition in a property policy requires the limit of insurance to be at least a set percentage of the property's value at the time of loss. When the limit falls short, the insurer pays only part of each loss: the share the limit carried bears to the limit required, less the deductible. This calculator runs that test and shows the limit required, the ratio, the payment the policy form sets and the amount not paid. The percentage is commonly 80%.1,2
Result
- Limit required
- $200,000
- Limit carried / required
- 0.50
- Coinsurance penalty
- $20,000
- The form's payment
- $19,750
- Not paid
- $20,250
Estimate from the numbers you enter. General information, not insurance, legal or financial advice. Your policy's wording decides what is paid.
How the math works
The penalty applies only when the value at the time of loss times the coinsurance percentage is more than the limit carried. When it applies, the most the policy pays is set in four steps.
- Step 1value at the time of loss x coinsurance percentage = the limit required.1
- Step 2limit carried / limit required. A limit that meets the requirement carries no penalty, so the calculator never lets this ratio go above 1.1
- Step 3total loss, before the deductible, x the Step 2 ratio.1
- Step 4Step 3 minus the deductible. The policy pays this amount or the limit, whichever is less.1
The coinsurance reduction comes first and the deductible second. If the reduced loss is at or below the deductible, nothing is paid. The amount not paid is the loss minus the payment.1
These are the steps in ISO's Building and Personal Property Coverage Form (CP 00 10, October 2012 edition), the standard commercial property form.1
Example
CP 00 10 prints this example: property valued at $250,000, 80% coinsurance, a $100,000 limit, a $250 deductible and a $40,000 loss.1
| Step | Arithmetic | Result |
|---|---|---|
| 1. Limit required | $250,000 x 80% | $200,000 |
| 2. Ratio | $100,000 / $200,000 | 0.50 |
| 3. Loss x ratio | $40,000 x 0.50 | $20,000 |
| 4. Minus deductible | $20,000 minus $250 | $19,750 |
| Not paid | $40,000 minus $19,750 | $20,250 |
- Payment$19,750
- Coinsurance reduction$20,000
- Deductible$250
- Total$40,000
In the form's Example 2, the same property carries a $200,000 limit. That meets the requirement, so no penalty applies and the most paid is $39,750.1
Where the numbers come from
- Value: what the property is worth at the time of loss, on the policy's valuation basis. CP 00 10 values property at actual cash value unless the declarations show its Replacement Cost optional coverage.1
- IRMI says insurable value is best set by a recent appraisal, or an older one brought current with inflation factors from the appraiser or insurer.3
- Coinsurance percentage: the declarations, shown for each covered item.
- Limit and deductible: the declarations, the front pages of the policy that list the limits and other details that vary from one insured to the next.
- Loss: the total amount of the loss before any deductible.
- In Texas, TWIA declarations list the percentage as "Coins (coinsurance) %".4
Questions
- How do you calculate a coinsurance penalty?
- Divide the limit carried by the value times the coinsurance percentage, multiply the loss by that ratio and subtract the deductible. The part of the loss left unpaid by that reduction is commonly called the coinsurance penalty.2,1
- What is the difference between 80%, 90% and 100% coinsurance?
- The higher the percentage, the higher the limit required: on a $250,000 value, 80% requires $200,000, 90% requires $225,000 and 100% requires $250,000.1
- Is the deductible applied before or after the coinsurance penalty?
- After. CP 00 10 first reduces the loss under the coinsurance condition, then subtracts the deductible from the reduced amount.1
- Does a coinsurance penalty apply to a total loss?
- The steps still run, but CP 00 10 pays the Step 4 figure or the limit, whichever is less. Arithmetic on those steps: a $2,400,000 value, 90% coinsurance, a $2,000,000 limit, a $5,000 deductible and a $2,400,000 loss give a Step 4 figure of about $2,217,222, so the $2,000,000 limit is the most the form pays.1
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Sources
The tool does arithmetic only and sends nothing anywhere. The rules it follows are from the published sources below.
- 1. Insurance Services Office (copy hosted by Independent Insurance Agents of Texas): Building and Personal Property Coverage Form, CP 00 10 10 12
- 2. IRMI: Coinsurance provision
- 3. IRMI: Property Insurance: Coinsurance (November 16, 2018)
- 4. Texas Windstorm Insurance Association: Factors that Affect the Claim Payment Amount