Most coinsurance problems do not start with a claim. They start months earlier, when a building or contents limit is set too low for the value the policy requires. A coinsurance penalty is a reduction in claim payment that can apply when your property is underinsured relative to the coinsurance percentage on the policy. In plain English, if the policy required you to carry more insurance than you actually carried, the carrier may only pay part of an otherwise covered loss. That is the part many business owners miss. The loss can be covered. The damage can be real. But the claim payment can still be reduced because the property was not insured to the required percentage before the loss happened. Before calculating a penalty, it helps to understand how commercial property insurance coverage is structured and how policy limits apply to buildings, contents, and business personal property. What is a coinsurance penalty? A coinsurance clause in commercial property insurance sets a minimum amount of insurance you are expected to carry. That minimum is usually based on a percentage of the property’s replacement cost, commonly 80%, 90%, or 100%. If your limit falls short of that required amount, the claim may be paid on a reduced basis. This is why coinsurance is not really a claim issue first. It is a valuation and limit issue first. If you want a deeper explanation of how coinsurance works in commercial property insurance , this penalty calculation makes more sense once the underlying clause is clear. When does a coinsurance penalty apply? A coinsurance penalty may apply when all three of these things are true: Your policy has a coinsurance clause. The property value used at claim time is higher than the value your limit was based on. The limit you carried is less than the amount required by the policy. That means a penalty can apply on a partial loss, not just a total loss.