Coinsurance explained

The best practice is to carry 100% insurance value at all times.  However, some policies have an 80%, 90% and/or 100% coinsurance clause.  These values reflect the insurance percentage the insurance company expects the client to maintain in order to be fully compensated in the event of a partial loss.  We refer to a partial loss as opposed to a full loss because with anything other than 100% insurance, full losses will not be fully compensated.

A useful formula is the following:  Did / Should X the Loss.

‍Example:  Full Replacement Cost of the Building is valued at $1,000,000 and the policy carries a 90% coinsurance clause.  However, the building is insured for $750,000.  Clearly, this limit is less than the 90% required. The building has a water damage loss and the cost to repair is $100,000.

Using our formula:  $750,000 (did) / $900,000 (should, $1,000,000 x 90%) x $100,000 (the amount of the loss).
The insured will be compensated for $83,333 rather than the full $100,000.  The penalty for not carrying the minimum 90% to value, in this example is $16,667.