By Susan Gropp, Arcana Insurance

In the past 18 months, the most often asked question to our underwriting and account executive team is, “What is the replacement cost value of a home we are purchasing in Mayberry, USA?” While it a question that has nothing to do with the Co-Insurance Penalty Clause, it is asked in majority of the property insurance forms that cover these investment opportunities.

So, what is a Co-Insurance Penalty? A Co-Insurance Penalty is a penalty assessed by a carrier for under-insuring the replacement cost of a property. Most policies require that a property be insured for at least 80% of the replacement cost of the damaged item. When figuring out the amount of insurance needed to equal EIGHTY PERCENT (80%) of the full replacement cost of the property at each location insured – do not to include the value of land or excavations, foundations, supports, underground pipes, flue, drains, and wiring which are below the surface of the ground. 

The penalty assessed will vary from carrier to carrier. One carrier may simply pay the claim at actual cash value instead of replacement cost. While other carriers may have a formula that will dictate what is paid out depending on how under-insured the property is and the amount of damage the property sustained. An example of a formulated calculation is shown in the box above.

The carrier may also elect to pay the greater of the actual cash value of the damages or the proportion of the settlement as computed above.

Co-insurance is checked on each claim. The adjuster will run a report to determine the replacement cost of the damaged property less the items which the policy dictates be deleted from the valuation. This report is then checked against the total insured value of the property to be sure that the report valuation is within 80% of the total insured value of the property.

Carriers may assess co-insurance penalties in different ways that can be quite financially devastating. Moreover, it can inhibit you from rebuilding the property to the state it was in previously without a significant amount of additional funds from the insured. Therefore, do not be caught off-guard by a co-insurance penalty and make sure your properties are insured for up to 80% of their replacement cost. 

And how do you do that with materials and labor costs skyrocketing in many areas of the country? We strongly suggest you ask a trusted General Contractor in the area where you are purchasing homes to give you their latest estimate. We also recommend regularly checking in with them and documenting those estimates in your insurance or loan file in case you may need that information when speaking with a claim adjuster at a later date. 

For more information, please visit And, as always, we hope this information was beneficial to you. However, please review your current policies with your insurance agent to get their professional advice on this important clause and any other terms or wording you are not familiar with. 

Arcana offers members of AZREIA multiple insurance products specifically designed for Investors and their tenants. Features include no underwriting or inspections, 24/7 desktop & smartphone certificate delivery system, outstanding claims management service, and our very knowledgeable & courteous staff to handle your insurance needs. For more information, please visit