Study guide
2.4 Coinsurance and Insurance to Value
Property & Casualty Insurance Exam
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1 Introduction
0.1 About the Property & Casualty Exam 0.2 How to Use This Course
2 Chapter 1: Insurance Fundamentals
1.1 Risk and Risk Management 1.2 Types of Risk 1.3 Principles of Insurance 1.4 The Insurance Contract 1.5 Policy Structure and Components
3 Chapter 2: Property Insurance Concepts
2.1 Property Coverage Basics 2.2 Perils, Hazards, and Exclusions 2.3 Valuation Methods 2.4 Coinsurance and Insurance to Value 2.5 Deductibles and Policy Limits
4 Chapter 3: Dwelling Policies
3.1 Dwelling Policy Overview 3.2 Dwelling Policy Forms (DP-1, DP-2, DP-3) 3.3 Dwelling Property Coverages 3.4 Dwelling Exclusions and Conditions
5 Chapter 4: Homeowners Policies
4.1 Homeowners Policy Overview 4.2 Homeowners Policy Forms (HO-2 through HO-8) 4.3 Section I: Property Coverages 4.4 Section II: Liability Coverages 4.5 Homeowners Exclusions 4.6 Homeowners Conditions 4.7 Common Homeowners Endorsements
6 Chapter 5: Personal Auto Policy
5.1 Personal Auto Policy Overview 5.2 Part A: Liability Coverage 5.3 Part B: Medical Payments Coverage 5.4 Part C: Uninsured/Underinsured Motorists 5.5 Part D: Physical Damage Coverage 5.6 PAP Exclusions 5.7 No-Fault Insurance and PIP
7 Chapter 6: Liability Insurance Concepts
6.1 Liability Insurance Basics 6.2 Negligence and Tort Law 6.3 Types of Legal Liability 6.4 Personal Umbrella Policies
8 Chapter 7: Commercial Property Insurance
7.1 Commercial Package Policy (CPP) 7.2 Building and Personal Property Coverage Form 7.3 Causes of Loss Forms 7.4 Business Income Coverage 7.5 Businessowners Policy (BOP)
9 Chapter 8: Commercial General Liability
8.1 CGL Policy Overview 8.2 Coverage A: Bodily Injury and Property Damage 8.3 Coverage B: Personal and Advertising Injury 8.4 Coverage C: Medical Payments 8.5 CGL Exclusions 8.6 CGL Limits and Conditions
10 Chapter 9: Commercial Auto Insurance
9.1 Business Auto Policy Overview 9.2 Covered Auto Designation Symbols 9.3 BAP Liability Coverage 9.4 BAP Physical Damage Coverage 9.5 Garage and Truckers Coverage Forms
11 Chapter 10: Workers Compensation
10.1 Workers Compensation Overview 10.2 Part One: Workers Compensation Insurance 10.3 Part Two: Employers Liability 10.4 Workers Compensation Exclusions 10.5 Other States and USL&H Coverage
12 Chapter 11: Other Commercial Lines
11.1 Inland Marine Insurance 11.2 Ocean Marine Insurance 11.3 Commercial Crime Insurance 11.4 Surety Bonds 11.5 National Flood Insurance Program 11.6 Professional Liability Insurance 11.7 Commercial Umbrella and Excess Liability 11.8 Boatowners and Personal Watercraft Insurance 11.9 Farm and Ranch Insurance 11.10 Mobile Home and Manufactured Housing Insurance 11.11 Title Insurance
13 Chapter 12: Insurance Regulations and Ethics
12.1 Producer Licensing 12.2 Producer Authority and Responsibilities 12.3 Unfair Trade Practices 12.4 Claims Settlement Practices 12.5 State Insurance Department 12.6 Penalties and Disciplinary Actions
2.4 Coinsurance and Insurance to Value
Key Takeaways Explain This Topic AI
Coinsurance requires the insured to carry coverage equal to a stated percentage (commonly 80%) of property value; falling short makes the insured a co-insurer who shares every loss.
Coinsurance formula: (Amount Carried ÷ Amount Required) × Loss = Claim, where Amount Required = Value × Coinsurance %.
The penalty applies to PARTIAL losses, not just total losses, and the payment can never exceed the lesser of the actual loss or the policy limit.
Agreed Value, inflation-guard endorsements, and annual value reviews are the practical defenses against a coinsurance penalty.
Insurance-to-Value (ITV) = Amount of Insurance ÷ Property Value; reaching the coinsurance percentage (e.g., 80%) avoids the penalty.
Last updated: June 2026
Why Coinsurance Exists
Most property losses are partial , not total. If underinsurance carried no penalty, owners would insure a $500,000 building for only $100,000, pay a small premium, and still recover most partial losses — starving the insurer of premium for the real exposure. The coinsurance clause corrects this by penalizing underinsurance on every loss, encouraging owners to insure to value.
Common coinsurance percentages: 80% (most common), 90%, and 100%.
The Coinsurance Formula Claim Payment = (Amount Carried / Amount Required) x Loss
- Term Meaning
- Amount Carried The policy limit actually purchased
- Amount Required Property Value × Coinsurance %
- Loss The actual damage amount
Two caps always apply: the payment can never exceed the actual loss or the policy limit , whichever is less. The deductible is then subtracted from the result.
Example 1 — Requirement Met
Building value: $500,000; coinsurance 80%; policy limit $400,000; loss $100,000.
Amount Required = $500,000 × 80% = $400,000 .
Ratio = $400,000 ÷ $400,000 = 100% .
Claim = 100% × $100,000 = $100,000 — the full loss is paid.
Example 2 — Coinsurance Penalty
Same building, but the owner carries only $300,000 .
Amount Required = $400,000 ; Amount Carried = $300,000.
Ratio = $300,000 ÷ $400,000 = 75% .
Claim = 75% × $100,000 = $75,000 .
The insured eats a $25,000 penalty on a $100,000 loss because they were a co-insurer for 25% of the exposure.
Example 3 — Loss Exceeds the Limit
Building value $1,000,000; coinsurance 80%; policy limit $700,000; loss $900,000.
Amount Required = $1,000,000 × 80% = $800,000 .
Ratio = $700,000 ÷ $800,000 = 87.5% .
Formula result = 87.5% × $900,000 = $787,500 .
But the payment cannot exceed the $700,000 policy limit, so the insurer pays $700,000 .
This is the most common exam trap: students apply the formula and forget the policy-limit cap.
Avoiding the Coinsurance Penalty
- Method How it helps Caveat
- Carry adequate limits Insure to at least the required % of value Values drift; review annually
- Agreed Value clause Suspends coinsurance entirely Needs appraisal / statement of values
- Inflation guard endorsement Auto-increases limits 4-8%/yr Does not guarantee compliance
- Insurance to Value (ITV) ITV Ratio = Amount of Insurance / Property Value
- ITV ratio Status Consequence
- 100%+ Fully insured Full loss recovery
- 80-99% Meets typical 80% coinsurance No penalty
- Below 80% Underinsured Coinsurance penalty applies
Worked ITV: $400,000 of coverage on a $500,000 building gives ITV = $400,000 ÷ $500,000 = 80% , exactly meeting an 80% requirement.
Key Exam Points
Coinsurance bites on partial losses, not only total losses.
Payment is the lesser of the formula result, the actual loss, or the policy limit.
80% is the most common requirement; the deductible comes off after the coinsurance math.
Agreed Value is the clean way to eliminate the penalty.
The shortfall is borne by the insured, who becomes a co-insurer .
Quick check: A $640,000 requirement met with $500,000 of coverage pays only $500,000/$640,000 = 78.125% of any loss — short of the 80% target and penalized.
Step-by-Step Method for Any Coinsurance Question
Work every coinsurance problem in the same four steps and you will not miss the cap or the deductible:
Compute Amount Required = property value × coinsurance percentage.
Form the ratio = amount carried ÷ amount required. If the ratio is 100% or more, treat it as 100% (you never collect a bonus for over-insuring).
Apply the ratio to the loss to get the formula result.
Cap and net — take the lesser of the formula result, the actual loss, and the policy limit, then subtract the deductible.
Fully worked: value $500,000; coinsurance 80% (required $400,000); carried $360,000; loss $50,000; deductible $1,000. Ratio = $360,000 ÷ $400,000 = 90%. Formula = 90% × $50,000 = $45,000. It is below both the loss and the limit, so subtract the deductible: $45,000 − $1,000 = $44,000 paid. The $5,000 gap is the coinsurance penalty plus the deductible.
Coinsurance on Business Income
Coinsurance is not limited to buildings. Business income coverage uses a coinsurance percentage (commonly 50%, 60%, 70%, 80%, or higher) applied to the 12-month net income plus continuing expenses the business would have earned had no loss occurred. If an insured selects a 50% business-income coinsurance percentage, they must carry a limit equal to at least half of projected annual net income plus continuing operating expenses; otherwise the same proportional penalty applies to a business-interruption claim.
The business income report/worksheet is how the insured supports the figure, and an agreed value option (or the monthly limit of indemnity and maximum period of indemnity options) can be used to sidestep the coinsurance test on time-element coverage.
Why Insurers Use 80% Rather Than 100%
A common exam reasoning question asks why the standard requirement is 80% rather than 100%. The answer: most losses are partial, so requiring 80% gives the insurer adequate premium relative to true exposure while building in a margin for ordinary fluctuations in property value — owners are not penalized for a small valuation drift, but gross underinsurance is discouraged. Setting the bar at 100% would penalize honest insureds for minor inflation between renewals; 80% balances fair pricing against ease of compliance, which is exactly the policy rationale the exam wants you to recognize.