For condominium and community associations, property insurance is one of the largest—and most complex—budget items. Among the most misunderstood components of a commercial property policy is the coinsurance clause.
Boards often hear the term during renewals or claim discussions, but few fully understand how coinsurance actually works, or how it can affect a community after a loss.
This lack of clarity can be expensive. If your buildings are undervalued on your policy, a coinsurance penalty could reduce your claim payout by tens or even hundreds of thousands of dollars. Here’s what community association leaders need to know.
What Is Coinsurance?
Coinsurance is an insurance policy provision that requires a property to be insured to a minimum percentage of its true replacement cost value—typically 80%, 90%, or 100%, depending on the carrier.
In simple terms:
Your association must insure the buildings at a sufficient amount, or the carrier can reduce your claim payment—even for a small loss.
Coinsurance is designed to ensure that property owners maintain accurate building values. When values are too low, the insurer shares less responsibility for a loss, and the association absorbs more.
How Does a Coinsurance Penalty Work?
If your property is insured below the required percentage, the insurance company will apply a coinsurance penalty, reducing the amount they pay on a claim.
Here’s the basic formula:
Insurance Carried ÷ Insurance Required × Loss Amount = Claim Payment
If the required value isn’t met, the payout is reduced proportionally.
Example: How a Coinsurance Penalty Impacts a Community Association
Let’s walk through a real-world scenario:
- True replacement cost of the building: $10,000,000
- Coinsurance requirement: 90%
- Minimum amount you should insure: $9,000,000
- Amount the association actually insured: $7,000,000
- Loss amount: $500,000 (e.g., fire, water damage, or storm event)
Step 1: Calculate the percentage of required insurance carried
$7,000,000 ÷ $9,000,000 = 0.777 (or 77.7%)
Step 2: Apply this percentage to the loss
0.777 × $500,000 = $388,500
Final Claim Payment: $388,500
Coinsurance Penalty to the Association: $111,500
Even though the loss was only $500,000—not a total loss—the association still absorbed a six-figure penalty because the building was underinsured.
Coinsurance and Government-Backed Loans
For community associations with units financed through government-backed mortgages—such as FHA, VA, Fannie Mae, or Freddie Mac—coinsurance provisions require particular attention.
These agencies do not prohibit coinsurance clauses outright, but they do require property insurance to be written at full replacement cost. This means the association must insure the buildings at 100% of their true replacement value, without depreciation, to follow lending guidelines.
If the association is underinsured and becomes subject to a coinsurance penalty, the resulting reduction in claim proceeds could prevent the property from being rebuilt to its pre-loss condition—putting the association out of compliance with federal lending requirements.
Communities that do not maintain full replacement cost coverage may jeopardize unit owners’ ability to secure FHA or VA loans or have mortgages purchased by Fannie Mae or Freddie Mac.
Ensuring accurate building valuations and avoiding coinsurance penalties helps protect not only the association’s financial stability but also the ongoing mortgage eligibility for all owners in the community.
Why Coinsurance Penalties Hit Community Associations Hard
Community associations are especially vulnerable to coinsurance issues because:
- Construction costs have increased rapidly in recent years
- Some rely on outdated or inaccurate replacement cost valuations
- Annual inflation adjustments on policies often fall short of real-world cost increases
- Older buildings may have unique construction materials or code upgrades that increase replacement costs
- Boards and managers may assume existing limits are “fine” without recent verification
If a claim happens during this gap, the financial impact can be severe.
How to Avoid Coinsurance Penalties
The good news: coinsurance penalties are 100% preventable with proactive planning.
- Get a Professional Insurance Appraisal Every 3–5 Years
This ensures your valuations match current construction costs—not outdated numbers.
- Review and Update Values Annually
Inflation guard increases may not keep pace with real cost trends. Your broker can analyze current market data and recommend adjustments.
- Insure for the full replacement cost of the building with an Agreed Value clause (Or waiver of Coinsurance)
- If you don’t have agreed value, Understand Your Policy’s Coinsurance Requirement
Know whether your policy requires 80%, 90%, or 100% of replacement cost and insure accordingly.
- Work With an Agent Who Specializes in Community Associations
Associations have unique construction styles, property types, and governing documents—accuracy matters.
- Communicate With Homeowners
Explaining why valuations and premiums increase helps owners understand that these updates prevent assessments later.
The Bottom Line
Coinsurance is a critical part of a community association’s property insurance policy. Best practice is to simply have coinsurance waived or an agreed value (aka agreed amount) clause added.
If your policy must include coinsurance, proactively reviewing and updating your association’s replacement cost ensures you comply with your coinsurance requirements. Doing so keeps your community financially protected when a loss occurs.
If your board hasn’t reviewed its property values recently, our team can help evaluate your current insurance program and ensure you’re properly protected—without surprises at claim time.