by Clark Sanchez, State Farm

Many property insurance policies contain a “co-insurance” clause or requirement. Sometimes this is also referred to as a policy with a “co-insurance penalty.”

A co-insurance provision requires that the property owner insure the building to at least a specified percentage of the replacement cost of that building. . .typically 80%, 90%, or 100% of the full replacement cost for that structure. An insurance policy is a legal contract, and this co-insurance provision encourages the policyholder to insure their property at or above, 100% of the estimated replacement cost for that building.

As an example, suppose that the re-build cost (same as replacement cost) for a certain building is $100,000. Let’s assume that the insurance coverage is $100,000 and that the policy has a 100% co-insurance requirement. If there is a big fire and the cost for repairs (after the policy deductible) is $60,000, the insurance policy will pay $60,000, because the property was insured for 100% of the cost to re-build.

But suppose that the owner decided to insure the building for only $40,000. Since $40,000 is 40% of $100,000, and since the policy had a co-insurance clause requiring $100,000 of coverage, for an insurance claim the insurance company will only pay 40% of the repair costs, or in the example stated above, only $ 24,000 (40% of the $60,000 repair cost.)

Continuing with the example above, if the policy had an 80% co-insurance clause, and the owner purchased at least $80,000 of insurance, he would collect the full amount of any claim loss, up to the policy limit of $80,000. But if the owner purchased $40,000 of building protection, in the event of a claim he would collect only 40 divided by 80 or 50% of the actual claim’s costs. If we again use the example above, with $60,000 in repair costs, then the insurance company will pay only $30,000 ($60,000 multiplied by 50%).

The “rate” for the insurance cost is always lower with a 100% insurance clause. We’re talking “cost per thousand of coverage”, NOT the actual policy premium. The rate for insurance that is below 80% of replacement cost, increases dramatically in order to discourage taking a policy where a claims penalty must be applied.

There are two methods to make sure that you do not find yourself in a “co-insurance” predicament. The first is to talk to your agent or agency about adding an “agreed amount endorsement” to your policy or changing your policy to an “agreed value policy.” Each of these guarantees in advance that the amount of building insurance in your policy meets all requirements so that you will receive 100% of the claims dollars in any dwelling loss (up to the policy limits.) The second method to avoid co-insurance issues, is to work with an insurance company that simply has no co-insurance requirements at all. Generally, these are ‘captive agent’ companies where the agent represents a single insurance company. In a nutshell, these agents are required to insure every building at 90% or 100% of re-build cost. Their customers benefit in the long run, because they can forget everything written in this article, as it does not apply to them. Ask your agent if you have a co-insurance requirement in your policy.

CLARK SANCHEZ has been an Arizona insurance agent for over 40 years and has been a Vendor-Affiliate with AZREIA for over 16 years. You can contact Clark if you have any insurance related questions at or (602) 803-2179