{"id":28,"date":"2025-04-10T18:25:33","date_gmt":"2025-04-10T18:25:33","guid":{"rendered":"https:\/\/johnsonroofers.com\/articles\/?p=28"},"modified":"2025-04-10T18:25:33","modified_gmt":"2025-04-10T18:25:33","slug":"understanding-the-coinsurance-clause-in-commercial-property-insurance-a-guide-for-contractors-and-owners","status":"publish","type":"post","link":"https:\/\/johnsonroofers.com\/articles\/2025\/04\/understanding-the-coinsurance-clause-in-commercial-property-insurance-a-guide-for-contractors-and-owners\/","title":{"rendered":"Understanding the Coinsurance Clause in Commercial Property Insurance: A Guide for Contractors and Owners"},"content":{"rendered":"

As a commercial building owner or stakeholder, you\u2019re no stranger to the importance of protecting your business assets. Whether it\u2019s your equipment, office space, or project sites, having the right commercial property insurance is essential to safeguarding your livelihood. However, buried within the fine print of these policies is a clause that can catch even seasoned business owners off guard: the <\/span>coinsurance clause<\/span><\/span>. This provision can significantly impact how much you recover after a loss, and misunderstanding it could leave you footing a larger bill than expected. Let\u2019s break it down using insights from a real-world legal case, Buddy Bean Lumber Co. v. Axis Surplus Ins. Co.<\/em>, 715 F.3d 695 (8th Cir. 2013)<\/span>, to illustrate its mechanics and implications.<\/span><\/span><\/p>\n

What Is Coinsurance?<\/span><\/span><\/h6>\n

At its core, coinsurance is a mechanism designed to ensure that policyholders maintain adequate insurance coverage relative to the value of their property. Think of it as a shared risk agreement between you and your insurer. The clause typically requires you to insure your property up to a certain percentage\u2014often 80%, 90%, or even 100%\u2014of its value. If you meet this threshold, the insurer covers the full amount of a loss (up to the policy limit, minus any deductible). But if you underinsure, you become a \u201cco-insurer,\u201d meaning you\u2019ll bear a portion of the loss yourself.<\/span><\/span><\/p>\n

The idea is to encourage proper coverage. Insurers know that many claims are for partial losses, not total destruction. Without coinsurance, a business owner might skimp on coverage, insuring only a fraction of their property\u2019s value while still expecting full reimbursement for smaller claims. The coinsurance clause levels the playing field by tying your recovery to how well you\u2019ve insured your assets.<\/span><\/span><\/p>\n

How Does It Work?<\/span><\/span><\/h6>\n

Let\u2019s say you own a workshop worth $1 million in replacement cost value (RCV)\u2014the amount it would take to rebuild it from scratch. Your policy has a 90% coinsurance requirement, meaning you need to carry at least $900,000 in coverage. If you insure it for only $600,000 and then suffer a $300,000 loss, you won\u2019t get the full $300,000. Instead, the insurer applies a formula:<\/span><\/span><\/p>\n

    \n
  1. \n
    Multiply the property\u2019s value by the coinsurance percentage: $1,000,000 \u00d7 0.9 = $900,000.<\/span><\/span><\/div>\n<\/li>\n
  2. \n
    Divide your actual coverage by that figure: $600,000 \u00f7 $900,000 = 0.667 (or 66.7%).<\/span><\/span><\/div>\n<\/li>\n
  3. \n
    Multiply the loss by this ratio: $300,000 \u00d7 0.667 = $200,100.<\/span><\/span><\/div>\n<\/li>\n
  4. \n
    Subtract the deductible (assume $5,000): $200,100 – $5,000 = $195,100.<\/span><\/span><\/div>\n<\/li>\n<\/ol>\n

    You\u2019d receive $195,100, leaving you to cover the remaining $104,900 out of pocket. Had you insured to the full $900,000, you\u2019d recover the entire $300,000 (minus the deductible).<\/span><\/span><\/p>\n

    Lessons from Buddy Bean Lumber Co. v. Axis Surplus Ins. Co.<\/em><\/span><\/span><\/h6>\n

    The 2013 case of <\/span>Buddy Bean Lumber Co. v. Axis Surplus Ins. Co<\/em>.<\/span><\/span> offers a practical example of how coinsurance disputes play out. Buddy Bean<\/em>, a lumber company, insured its saw mill and planer mill under a policy with a 90% coinsurance clause. After thieves stripped the mills of electrical wiring, causing a $725,000 loss, Buddy Bean<\/em> filed a claim based on actual cash value (ACV)\u2014the property\u2019s worth accounting for depreciation\u2014rather than replacement cost. They argued that \u201cvalue\u201d in the coinsurance clause should mean ACV ($3.3 million for the saw mill and $750,000 for the planer mill), which, when multiplied by 90%, fell below their coverage limits of $3 million and $837,500, respectively. Under this logic, no penalty would apply.<\/span><\/span>
    \nAxis<\/em>, the insurer, countered that \u201cvalue\u201d meant replacement cost ($14 million for the saw mill and over $4 million for the planer mill), since Buddy Bean<\/em> had elected replacement cost coverage. With 90% of those figures far exceeding the policy limits, Axis<\/em> applied the coinsurance penalty, reducing the payout significantly. The trial court initially sided with Axis<\/em>, ruling that electing replacement cost coverage redefined \u201cvalue\u201d as RCV in the coinsurance clause, making Buddy Bean<\/em> a co-insurer for underinsuring. However, on appeal the 8th circuit reversed, holding that the term “value” in the policy turned on what coverage the insured had elected to pursue – in this case, the ACV benefits.
    \n<\/span><\/span><\/p>\n

    What This Means for Nebraska Commercial Property Owners<\/span><\/span><\/h6>\n

    This case underscores a key takeaway: the type of coverage you choose and the benefits you pursue in a claim\u2014ACV or RCV\u2014can reshape how coinsurance applies. If you opt for replacement cost coverage to rebuild after a loss (common in construction, where equipment and buildings must be restored to full functionality), your coinsurance calculation may hinge on that higher RCV figure. Underinsuring based on a lower estimate could trigger a penalty, even if your claim is modest. In other words, when applying for a policy with RCV coverage you must make sure your policy limit reflects what it would cost to rebuild from scratch, rather than using a figure closer to the actual cash value of the asset.<\/span><\/span><\/p>\n

    To avoid this trap, regularly assess the replacement cost of your assets\u2014tools, vehicles, structures, and anything else insured\u2014and ensure your policy limits align with the coinsurance percentage. Work with your insurance agent to update valuations, especially as material costs fluctuate (a reality we\u2019ve all felt in recent years). And if budget constraints tempt you to cut coverage, weigh that against the risk of becoming a co-insurer when disaster strikes.<\/span><\/span><\/p>\n

    \n
    Final Thoughts<\/span><\/span><\/h6>\n<\/div>\n
    The coinsurance clause isn\u2019t just legalese\u2014it\u2019s a financial lever that can either protect or penalize you. At Johnson Restoration Services, we help owners, investors, and other stakeholders stay informed and up-to-date about their commercial properties so they can focus on their businesses and tenants. See how we can help you with our First Response Program<\/a> and Claim Management<\/a> services.<\/span><\/span><\/div>\n","protected":false},"excerpt":{"rendered":"

    As a commercial building owner or stakeholder, you\u2019re no stranger to the importance of protecting your business assets. Whether it\u2019s your equipment, office space, or…<\/p>\n","protected":false},"author":2,"featured_media":29,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","enabled":false},"version":2}},"categories":[4,6],"tags":[],"class_list":["post-28","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-insurance","category-property-owner-guides"],"jetpack_publicize_connections":[],"_links":{"self":[{"href":"https:\/\/johnsonroofers.com\/articles\/wp-json\/wp\/v2\/posts\/28","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/johnsonroofers.com\/articles\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/johnsonroofers.com\/articles\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/johnsonroofers.com\/articles\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/johnsonroofers.com\/articles\/wp-json\/wp\/v2\/comments?post=28"}],"version-history":[{"count":7,"href":"https:\/\/johnsonroofers.com\/articles\/wp-json\/wp\/v2\/posts\/28\/revisions"}],"predecessor-version":[{"id":36,"href":"https:\/\/johnsonroofers.com\/articles\/wp-json\/wp\/v2\/posts\/28\/revisions\/36"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/johnsonroofers.com\/articles\/wp-json\/wp\/v2\/media\/29"}],"wp:attachment":[{"href":"https:\/\/johnsonroofers.com\/articles\/wp-json\/wp\/v2\/media?parent=28"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/johnsonroofers.com\/articles\/wp-json\/wp\/v2\/categories?post=28"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/johnsonroofers.com\/articles\/wp-json\/wp\/v2\/tags?post=28"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}