These provisions police the indemnity principle at claim time.
A co-insurance clause requires the insured to maintain insurance on the property to a minimum percentage of its value (commonly 80%, 90%, or 100% on commercial property). If the insured under-insures below that percentage, the insurer pays only a proportional share of the loss. The classic formula:
Loss payable = (Amount carried ÷ Amount required) × Loss − DeductibleA deductible is the amount of each loss borne by the insured before the insurer pays. Deductibles control premium, deter trivial claims, and align incentives.
Insurance to value is the broker's duty: ensure the policy limit reflects the true replacement or actual-cash-value cost of the property. Under-insurance hurts the client at claim time; over-insurance simply raises premiums without raising recoverable amount (indemnity caps recovery at the loss).
A typical exam scenario gives you a building worth $1,000,000, an 80% co-insurance clause (so $800,000 required), policy limit of $600,000 (so $200,000 short), and a $200,000 loss. Apply the formula: ($600,000 ÷ $800,000) × $200,000 = $150,000, less any deductible.
Common mistake: applying co-insurance only to total losses. The penalty applies to partial losses too. That is exactly where under-insured clients are most surprised. A total loss is usually paid to the policy limit regardless.
⚠️ Trap: A co-insurance shortfall is the broker's E&O bullseye. If you let a client carry $600,000 on a $1,000,000 building, you bear professional risk if the client is penalized at claim time.
Recall: Write the co-insurance formula from memory. What is the broker's role in preventing a co-insurance penalty?