Can you work an example?

A building worth $1,000,000 with an 80% clause requires $800,000 of insurance. If you carry $600,000, you have carried 75% of what was required. A $100,000 fire is then settled at 75% — $75,000 — less your deductible, and you fund the rest. Notice that the building was insured for $600,000 and the loss was $100,000, so the limit was never the constraint. That is what surprises people: the penalty applies even though the policy limit comfortably exceeded the claim.

Why does coinsurance exist at all?

Because most losses are partial, so if everybody insured to 30% of value and paid 30% of the premium, insurers would collect a fraction of the premium and pay nearly all of the claims. The clause makes the rate depend on insuring properly. It is a bargain rather than a trap — you receive a lower rate in exchange for carrying an adequate limit — but it is a bargain most owners are never told they made.

How does it interact with a percentage wind deductible?

Badly, in the sense that both are calculated off the insured value and they compound. A coinsurance shortfall reduces the settlement, and a percentage deductible is then subtracted from the reduced figure. An underinsured coastal building with a 2% wind deductible can find a moderate storm claim producing very little net recovery. Both numbers deserve checking together before hurricane season rather than after.

What is coinsurance on a property policy, and how do I avoid the penalty?

It is a clause that requires you to insure the property to a set percentage of its value — commonly 80% — in exchange for the rate you were quoted. Insure for less and the insurer reduces every claim payment by the same proportion you were short, including on small partial losses. The way to avoid it is either to keep the limit genuinely current, or to buy an agreed value endorsement, which suspends the clause because the insurer has accepted your valuation in advance.

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The detail

The coinsurance settlement is the amount of insurance carried divided by the amount required, multiplied by the loss, less the deductible — so a shortfall reduces partial losses proportionally.
International Risk Management Institute

What this means for you

Do the arithmetic once on your own building. Carried ÷ required × loss − deductible. It is more punitive than it sounds.
The clause is tested at the DATE OF LOSS, not when you bought the policy. Construction inflation can put you in breach without you changing anything.
Agreed value is the clean fix where the insurer will offer it, and it usually needs a signed statement of values at each renewal.
Watch business income coinsurance separately. It works the same way against your projected annual income, and it is missed far more often than the building one.

Go deeper on any of these

Setting the building limit

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We do the filings, and we place the accounts other brokers decline — lapsed authority, claims history, new ventures. Tell us the situation and a licensed human replies the same business day.