What does 'co-insurance' refer to in commercial property insurance?

Co-insurance in commercial property insurance refers to a requirement that policyholders carry a certain percentage of the property value to be eligible for full claims in the event of a loss. This concept is designed to encourage policyholders to insure their property to a value that reflects its actual worth.

Essentially, the co-insurance clause stipulates that if a property is underinsured at the time of the loss, the amount payable by the insurer will be reduced in proportion to the amount of insurance carried compared to the percentage of the property value required. For example, if a building valued at $1,000,000 has an 80% co-insurance requirement, the property should be insured for at least $800,000. If it is insured for only $600,000, and a loss occurs, the insurer would only pay a percentage of the claim based on the underinsurance.

This principle prevents policyholders from underinsuring their property in order to save on premiums, thus ensuring that they have adequate coverage to rebuild or replace their assets in case of a loss. By aligning the amount of insurance with the actual risk, co-insurance helps to mitigate moral hazard and ensures fair compensation in claims scenarios.