Coinsurance is an insurance policy provision that can reduce a property insurance claim payment when a building is insured for less than the percentage of its value required by the policy. For commercial property owners, this can become especially important after a major roof loss because the cost to repair or replace a commercial roof can be substantial.
A coinsurance clause generally requires the insured property to carry coverage equal to a specified percentage of its value, commonly 80% or another percentage stated in the policy. If the property is underinsured when a covered loss occurs, the insurer may apply a coinsurance penalty and pay only a proportion of the covered loss. The Florida Department of Financial Services specifically explains that an 80% coinsurance clause can reduce a commercial property claim when the insured value falls below the required amount.
How Does Coinsurance Affect a Roof Claim?
Consider a commercial building with a replacement value of $2 million. If the insurance policy has an 80% coinsurance requirement, the property generally needs at least $1.6 million of coverage to satisfy the requirement.
Now assume the building is insured for only $1.2 million and suffers a covered roof loss costing $400,000 to repair.
The calculation may work approximately like this:
Required insurance: $2,000,000 × 80% = $1,600,000
Coinsurance ratio: $1,200,000 ÷ $1,600,000 = 75%
Covered roof loss: $400,000 × 75% = $300,000
The applicable deductible and other policy provisions would then be considered. In this example, the property owner could receive substantially less than the full covered repair cost because the building was underinsured.
The exact calculation depends on the policy language, valuation method, deductible, applicable limits, exclusions and other conditions. Travelers describes the same basic principle: the limit of insurance is compared with the required percentage of the property’s value, and an unmet coinsurance requirement can proportionally reduce the claim payment.
Why Is This Important for Commercial Roofs?
Roof replacement costs can change significantly because of labor, materials, insulation, decking, code requirements and other construction expenses. If a commercial property’s insurance limit was established years ago and has not kept pace with construction costs, the policy may no longer satisfy its coinsurance requirement.
For example, a roof and building that once cost $1 million to replace could require considerably more coverage today. If the policy limit remains unchanged, the owner may discover the problem only after a major loss.
Coinsurance is also different from a deductible. A deductible is the amount the policyholder is responsible for before insurance pays a covered claim. Coinsurance can reduce the amount of the covered loss payable when the required insurance-to-value percentage has not been met. Florida’s Department of Financial Services separately identifies deductibles and coinsurance as factors affecting commercial property coverage and claim payments.
How Can Property Owners Reduce the Risk?
Commercial property owners should review their insurance declarations and policy conditions periodically, particularly when construction costs rise, a building is expanded, or major improvements are made.
Ask the insurance agent or broker:
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What coinsurance percentage applies to the building?
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What valuation method is being used?
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What property value is being used to determine the required limit?
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Does the policy contain an agreed-value provision or another option that affects coinsurance?
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Are roof improvements and other capital upgrades properly reflected in the insured value?
Florida’s commercial property guidance notes that the applicable coinsurance percentage is identified in the policy declarations and that commercial property policies can contain numerous forms and endorsements.
Shieldline Roofing Can Help Document Roof Conditions
Before a major roof claim occurs, maintaining accurate roof documentation can be valuable. Current roof inspections, photographs, maintenance records, repair invoices and detailed information about roof assemblies can help property owners understand their roof’s condition and communicate more effectively with insurance professionals.
If you are evaluating a commercial roof in Florida, Shieldline Roofing can help assess its condition and document existing roofing components. Property owners should also consult their insurance agent, broker, public adjuster or qualified insurance professional regarding the specific coinsurance provisions in their policy.
The key takeaway: coinsurance can reduce a roof claim payout when a property is underinsured relative to the percentage required by the policy. Reviewing coverage limits against current replacement costs before a loss occurs can help commercial property owners avoid an unexpected coinsurance penalty.
Related Questions
- How does building valuation affect a total roof loss claim?
- What is an actual cash value roof endorsement?
- What is the difference between a percentage deductible and a flat deductible?
- How do you establish the date of loss for a roof claim?
- What is a roof surfacing schedule endorsement?
- When should a policyholder invoke appraisal?
- How do depreciation and recoverable depreciation work on a roof claim?
Commercial Roof Replacement / Re-Roofing
