Co-Insurance Explained: Maximizing Protection with a Replacement Cost Appraisal

A replacement cost appraisal can help prevent a co-insurance penalty on a property’s insurance policy by accurately determining the full replacement value of the property and the amount to be insuredIf a co-insurance clause is present on your policy, you could be at risk of severe penalties and ineligible for full payouts in the case of a total or even partial loss.

Understanding Co-Insurance 

Co-insurance is a term commonly used in insurance policies. It refers to the cost-sharing arrangement between the insurance provider and the insured individual or policyholder. 


A co-insurance clause requires policyholders to insure their property for a specified percentage of its full replacement value, typically ranging from 80% to 100%. If the property is not insured to the specified percentage, a co-insurance penalty may be applied in the event of a claim. 


Suppose you own a building and the replacement cost is $1,000,000. Your property insurance policy has a co-insurance requirement of 80%. This means that you must insure the property for at least $800,000 to receive the maximum amount of coverage. Instead, you choose to insure the property for only $600,000. In this scenario, the insurance company will apply the co-insurance formula to calculate the payout amount in the event of a claim.


Co-insurance formula: ([Policy limit / Required limit] x Loss) – Deductible = Claim payment


The policy limit would be $600,000. The required limit is $800,000 (80% of the total replacement cost).


Let’s consider two examples to understand how co-insurance would apply to property losses.

Example One – Partial Loss

There is a water leak in your building causing $200,000 worth of damage. The deductible is $5,000. Since you insured the property for only $600,000, the insurance company will consider your coverage to be insufficient. They will calculate the penalty for underinsurance based on the co-insurance formula.


In this case, the calculation would be:


([$600,000 / $800,000] x $200,000) – $5,000 = $145,000


This means that the insurance company will only pay $145,000 for the claim, and you would be responsible for the remaining $50,000 out of pocket, plus the deductible.


Had you had insured the property for at least 80% of its value, the co-insurance penalty would not have been triggered and you would have received the full $200,000, minus the deductible.

Example Two – Total Loss

In the case of a property claim that results in a total loss, the co-insurance clause can have a significant impact on the amount of reimbursement you receive from the insurance company.


Using the same values from the last example, consider there is a fire that results in a total loss of the building. The deductible is $25,000. In this scenario, the loss value would be the maximum limit of coverage, which is $600,000.


Using the co-insurance formula:


([$600,000 / $800,000] x $600,000) – $25,000 = $425,000


Based on this, the insurance company would only reimburse you for $450,000 based on the co-insurance penalty, minus the deductible.


In order to rebuild the same property, at an estimated $1,000,000 replacement cost value, you would be responsible for paying the remaining $550,000 out of pocket, plus the policy deductible.

Obtain an Appraisal to Avoid Co-Insurance

Co-insurance is designed to encourage policyholders to adequately insure their property. It serves as a mechanism to distribute risk between the insurer and the policyholder. Insuring your property to the full replacement cost can help avoid co-insurance penalties and ensure sufficient coverage in the case of a loss. Only a credible, experienced appraisal firm can reliably determine the full replacement cost of a property.

Steps to Avoiding Co-Insurance

  1. Engage a third-party, professional firm specializing in replacement cost valuations (like Normac).

  2. Obtain appraisals on an annual basis and insure your property to the full replacement cost amount.

An accurate insurance appraisal should consider all costs to rebuild, including all hard and soft costs, and should account for demolition and removal, upgrades required to meet current building code and bylaws, fluctuation to construction costs, and regional costing.

  1. Share the appraisal with your insurance provider at the time of the insurance policy renewal. Bonus: if you align the appraisal program effective date with the insurance policy renewal date, you can ensure accuracy and avoid midterm adjustments.


  2. Have peace of mind that your assets are protected in the case of a loss. 

Normac’s Insurance Appraisal Experts

Normac is the largest specialized insurance appraisal company in Canada. Our team has extensive knowledge of construction costs, utilizes our own proprietary costing database, and provides industry-leading reports with additional details to maximize your coverage potential and help you to secure the best terms.  


Losses do happen. Request a no-obligation quote today and mitigate the risk of a co-insurance penalty.