Coinsurance clauses are commonly found in a Builder's Risk Completed Value policy. As the name suggests, a coinsurance clause makes the policyholder a co‑insurer of the risk, so under certain conditions the insurer will not pay the full amount of a loss and the policyholder will bear the remainder.
The main benefit of a policy with a coinsurance clause is generally lower premiums compared with similar policies that do not include the clause. That benefit comes with responsibility: policyholders should understand how the clause works and what it requires to avoid surprises and penalties after a loss.
A typical coinsurance clause in a Builder's Risk Completed Value policy states that the insurer will not pay more for any loss than the proportion that the limit of insurance bears to the value of the structure described in the declarations as of the structure's date of completion.
The way the coinsurance clause interacts with the policy limit is a common source of confusion. For example, a $20,000 loss under a $100,000 policy might appear to be fully covered, but the coinsurance clause can reduce the insurer's payment if the policy limit is less than the completed value of the project.
If coinsurance is applied, the calculation can reduce the insurer’s share of a loss. Using the same numbers, if the completed value of the project is determined to be $120,000 at the time of loss, the $100,000 limit equals only 80% of that value. The insurer would then be responsible for only 80% of the $20,000 loss — or $16,000 — and the policyholder would cover the remaining $4,000.
Any time the policyholder receives less than the full value of a claim because of a shortfall between the completed value and the policy limit, that shortfall is called a coinsurance penalty. A coinsurance penalty often results from mistakes such as failing to report cost overruns or not including all relevant costs in the completed value.
Any increased completed value must be reflected in the policy limit when costs overrun original figures. The most reliable way to make sure the policy limit is updated is to keep your insurance agent informed of overruns so the insurer can adjust the limit appropriately.
All too often, policyholders set their limit of insurance based on the amount of the construction loan. In many projects the completed value exceeds the financed amount because portions of the project may be funded by cash or other non‑loan sources; if those amounts aren’t included in the completed value, the policyholder faces a coinsurance penalty.
For coverage that addresses situations where the completed value and financed amount differ, see Large Conglomerates and Boat Builders Insurance.
Another common omission is failing to include profit and overhead in the completed value; these are often estimated at 10% each and can materially affect the completed value if omitted.
It is also important to avoid including items that should not be part of the completed value. Land value, excavations, and underground work are typically not covered on standard Builder's Risk forms and should not be counted in the completed value, or the policyholder will be paying for coverage that won’t apply to those items.
When a coinsurance penalty is a concern, consider reviewing related coverage options to limit exposure. For additional detail on related coverage, see What is Coinsurance Deficiency Coverage?.
Specialized installations and niche construction work can introduce additional valuation pitfalls; for targeted guidance on those risks, see Chair Lift Distributors Builders Risk Insurance: Essential Coverage for Specialized Installations.
If you are unsure whether your completed value and policy limit match the project’s scope, talk to an agent.
Frequently Asked Questions
What is a coinsurance clause?
A coinsurance clause makes the insured share in the risk by requiring the policy limit to be a specified percentage of the completed value; otherwise a penalty reduces the insurer’s payment.
How is a coinsurance penalty calculated?
The insurer pays the proportion that the policy limit bears to the completed value multiplied by the loss amount, so underinsurance reduces the insurer’s share of the claim.
What costs should be included in the completed value?
Include all construction costs that contribute to the completed structure, such as labor, materials, profit, and overhead, but exclude items typically not covered like land value and certain underground work.
What can I do to avoid a coinsurance penalty?
Keep your insurer or agent informed of cost overruns, ensure profit and overhead are included, and review limits as project scope changes.