The majority of every property insurance policy including homeowners insurance, commercial property, rental dwellings and flood insurance policies have a Coinsurance penalty clause in the policy.

The Coinsurance penalty clause prevents you from reducing the insured value of the property below the replacement cost.

“I have a two story house but I only want to insure the bottom floor”

That was an actual statement from a customer.

The insurance company will not allow you to choose to only insure a portion of your property.

They also will not allow you only insure the property for your loan value or what you owe on the property.

You need to purchase insurance to the replacement cost of your property minus the land value.


How do you determine the replacement cost?

You can ask a local contractor.

You can ask a local home appraiser.

Building construction costs can fluctuate.

Today the replacement cost of your house could be $100 a square foot but it could rise to $150 a square foot.

It all depends on the materials used in the construction of your property.

You just need to remove the land value in the discussion.

Forget about property values increasing or decreasing due to recent home sales in your neighborhood.


You only insure the property to the actual cost of you hiring a contractor to rebuild your house minus the land.


What is the Coinsurance Value?


It is the percentage % of value you are required to insure the property at replacement cost.

If the replacement cost is $200,000, you need to insure the property to 200,000.

If you only insure the property for 150,000, here is the penalty equation

150,000 divided by 200,000 = .75 or 75% of replacement cost.

So if your next claim loss is at 25,000, you would not receive 25,000.

You would receive 25,000 x .75 = $ 18,750 minus your deductible would be the payout.


Some companies will allow an 80% or 90% Coinsurance clause so as long as you are within 80% or 90% of the replacement cost you will not be subject to any penalties.


What’s this all about?

There are ways to lower your insurance premium but lowering the insured value of the property should not be one of them because you will get penalized on your next claim check and you could be out $$$ thousands…

Try raising your deductible and transfer more of the risk to you away from the insurance company to lower your premium.

Ask about all the discounts available on the policy.

You may now qualify for premium discounts that were not available at policy inception or your agent didn’t review with you.