Why coinsurance exists: most property losses are partial. Without a coinsurance clause, an owner could insure a $1,000,000 building for $200,000 and still collect in full on almost every loss. The clause supports adequate premiums and encourages insurance to value. The advantage to the insured is a lower rate; the disadvantage is that an underinsured owner shares in every partial loss.

The calculation: (amount carried ÷ amount required) × loss, then subtract the deductible. The amount required is the coinsurance percentage times the value of the property at the time of loss, not at purchase. Payment never exceeds the limit.

Example: a building is worth $1,000,000 at the time of loss with 90% coinsurance, so $900,000 is required. The owner carries $720,000, a ratio of 0.8. A $50,000 loss with a $1,000 deductible pays $50,000 × 0.8 = $40,000, minus $1,000 = $39,000. Taking the deductible off first ($49,000 × 0.8 = $39,200) is the common error.

How is the value of a commercial building set for coinsurance? The CDI outline says fair market value may be used to determine the actual cash value of a commercial building for the purpose of applying a coinsurance provision. Current California law in §2051(b) measures an actual cash value recovery as the cost to repair, rebuild or replace less physical depreciation, or the policy limit if less.