What is a co-insurance clause?

A co-insurance clause appears in most commercial property and condo insurance policies as a requirement that you maintain coverage equal to a set percentage of your property's replacement cost. If the clause requires 80% insurance (the most common threshold) and your building is worth $1 million, you must carry at least $800,000 in coverage to avoid a penalty on claims.

The penalty applies if you are underinsured. When you file a claim, the insurer calculates what you should have been insured for and reduces payment proportionally. For example, if you carried only $600,000 on a $1 million property with an 80% co-insurance requirement, you would be underinsured by $200,000. The insurer would pay claims at 75% of their value (the amount you did carry versus the amount required) rather than in full.

Co-insurance clauses protect insurers from adverse selection: property owners cannot deliberately underinsure to save premium costs while keeping the same claims protection. They also encourage owners to maintain accurate property valuations and sufficient coverage limits. This clause is standard in Toronto commercial real estate, particularly for office buildings, retail space, and multi-unit residential properties. When shopping for coverage, work with an insurer to confirm your replacement value estimate and ensure your coverage limit meets or exceeds the policy's co-insurance percentage.