Coinsurance Penalty Calculator
Commercial property policies often include a coinsurance clause that requires you to insure a building to a set percentage of its replacement value. If you carry less than required when a loss occurs, the insurer pays only the proportion you did insure and you bear the shortfall as a penalty. This calculator applies the standard coinsurance formula: it finds the required coverage, the penalty factor, and the actual payout after the deductible and policy limit. Enter the property value, the coinsurance percentage, the coverage you carry, the loss amount, the deductible, and the policy limit to see exactly how underinsurance reduces your claim.
Coinsurance penalty formula
Coverage required = property value * coinsurance % / 100
Penalty factor = min(1, coverage carried / coverage required)
Proportional loss = loss * penalty factor
Payout = min(policy limit, proportional loss) - deductible (floored at 0)
Penalty borne = loss - deductible - payout (floored at 0)
If carried coverage meets or exceeds the requirement, the penalty factor is one and the loss is paid in full up to the limit, less the deductible. Underinsurance pushes the factor below one and reduces the payout proportionally.
Worked example
A $1,000,000 building with an 80 percent clause requires $800,000 of coverage. With $600,000 carried, the penalty factor is 600,000 / 800,000 = 0.75. A $200,000 loss pays 200,000 * 0.75 = $150,000, minus a $5,000 deductible = $145,000 (under the $600,000 limit). You bear 200,000 - 5,000 - 145,000 = $50,000 of the penalty.
Coinsurance penalty: frequently asked questions
What is a coinsurance clause?
A coinsurance clause in a commercial property policy requires the insured to carry coverage equal to at least a stated percentage (commonly 80, 90, or 100 percent) of the property's replacement value. If coverage falls below that threshold at the time of loss, the insurer pays only a proportional share of the claim and the insured absorbs the rest as a penalty.
What is the coinsurance penalty formula?
Payout = loss times (coverage carried divided by coverage required), capped at the policy limit and reduced by any deductible. Coverage required equals the property value times the coinsurance percentage. The ratio of carried to required coverage is the penalty factor; if it is one or more, there is no penalty.
How do I avoid a coinsurance penalty?
Insure the property to at least the required percentage of its current replacement value. Because replacement costs rise over time, a building insured to value last year can fall below the threshold this year. Reviewing the insured value against current replacement cost each renewal is the practical safeguard.
Does the deductible apply before or after the penalty?
The penalty proportion is applied to the loss first, then the deductible is subtracted from the proportional amount, and the result is capped at the policy limit. This calculator follows that common order. Policy wording can vary, so confirm the sequence in your own contract.
Official sources
- U.S. National Association of Insurance Commissioners: naic.org.
- U.S. Small Business Administration: Get business insurance.
Reviewed by the CalculatorHub team, edited by James Graham, 19 June 2026. See our methodology.