What is a coinsurance clause in a commercial property policy?

Complete Guide to Coinsurance Clauses in Commercial Property Policies

Why This Question Matters for Colorado and Utah Residents

Understanding the coinsurance clause is critical for business owners in Colorado and Utah, especially given our region's unique risks and rapid growth. Severe weather, wildfires, and construction cost spikes have made proper valuation and coverage more important than ever.

• High Risk of Severe Weather: Colorado is #2 nationally for hail claims, and Utah faces increasing wildfire and flood exposures. Underinsuring can mean major losses after the next big storm or fire.
• Rising Rebuilding Costs: Construction and equipment prices in Weld, Larimer, Denver, Salt Lake City, and Utah County have jumped 20–30% in the last five years.
• Claim Payment Surprises: Many businesses discover after a loss that their coinsurance penalty reduces claim payments—sometimes by tens of thousands of dollars.

What Most People Get Wrong

Many local business owners set their coverage limit years ago and haven't updated it to reflect current rebuilding or replacement costs. They mistakenly believe their policy limit or their mortgage balance is enough—when a coinsurance clause actually requires insuring to a percentage of today’s full property value. Some also confuse “coinsurance” with “co-pay” (medical insurance), leading to further confusion.

Another common misconception: thinking coinsurance is optional or only applies above certain limits. In reality, most Colorado and Utah commercial property policies use this clause to help ensure adequate protection for everyone insured.

The Complete Picture

A coinsurance clause in your commercial property policy requires you to insure your property to at least a certain percentage (typically 80% or 90%) of its current replacement cost—not the mortgage balance, not what you paid, and not its market value. If you insure for less, the insurer may reduce your claim payment based on how underinsured you are, even after a covered loss.

For example, if your building costs $1 million to rebuild but you only insure it for $600,000 and your policy has a 90% coinsurance requirement, you could face a substantial penalty on your claim. In Colorado and Utah, where hail, wildfire, and flood risks drive claims that frequently exceed policy limits, this can mean tens or hundreds of thousands out of pocket. That's why experts and state regulators urge accurate, annual property valuations, and periodic reviews—especially following major regional disasters or construction booms that spike costs.

Making the Right Decision for Colorado and Utah Residents

Question 1: Am I Insuring to True Replacement Cost?

Don't guess. Assess your building and contents annually using recent construction bids or valuations, not just your bank's required amount. Regional rebuilding costs in Fort Collins and Salt Lake City are rising faster than inflation.

• Request a professional appraisal or contractor estimate every 2–3 years.
• Include all upgrades, fixtures, and business-specific equipment.

Question 2: Is My Coinsurance Percentage Appropriate for My Property?

Review whether your coinsurance percentage (often 80% or 90%) matches your risk tolerance and business growth. Higher percentages offer more premium savings but less penalty forgiveness if underinsured.

• If you own multiple locations, ask if a blanket policy or higher coverage percentage is smart for your situation.
• Check with your broker during annual renewals—especially after large regional claim events or price changes.

Question 3: Am I Reviewing My Clause and Coverage Regularly?

Major regional events (hail, wildfire, construction booms) can spike costs. Set a reminder to check your coinsurance clause and property values every policy renewal.

• Document property and upgrades—even small changes may affect your values.
• Ask for mid-year reviews if you invest in renovations, expansions, or major equipment purchases.