2.2 Coinsurance Formula & Loss Settlement Calculations
Apply the Did/Should coinsurance equation to calculate penalty deductions for underinsured commercial and residential property.
Key Blueprint Takeaways
- Formula: (Carried Insurance / Required Insurance) * Loss - Deductible = Payout.
- Required insurance equals Replacement Cost multiplied by the policy coinsurance percentage (usually 80%).
- Coinsurance penalties apply ONLY to partial losses; total losses pay the policy face limit.
The coinsurance clause encourages property owners to insure property to full value. Most commercial and homeowners policies establish an 80% coinsurance threshold.
If an insured fails to carry at least 80% of the replacement cost at the time of loss, they become a 'co-insurer' and must share in any partial loss proportionally based on the Did/Should ratio.
A commercial building with a true replacement value of $500,000 is insured for $300,000 under a policy with an 80% coinsurance clause and a $2,000 deductible. A storm causes $40,000 in covered direct physical damage. What is the total claim payout the insurer will issue under the coinsurance formula?