Updated February 2026
If you haven’t updated the replacement cost values in your commercial property insurance policies, you risk jeopardizing your bottom line if a claim occurs. Here’s why: some policies contain provisions that reduce your claim payout if you have an out-of-date, too-low valuation. To help protect your investment, here’s what you need to consider.
As you know, coinsurance is a provision in a commercial property insurance policy obliging you to share in the cost of a claim after meeting the deductible. The policy specifies the coinsurance formula and requires you to insure your property to a specified percentage of its replacement value — typically, 80%, 90%, or 100%.
Given supply chain challenges, inflation, and increased labor costs in recent years, many property owners unknowingly have valuations below the threshold listed in the policy.
Suppose the current replacement cost value for your property is $1,000,000, but your insurance policy has an out-of-date figure of $600,000. If your coinsurance clause requires you to insure 80% of the replacement value ($800,000, in this example), you could face an unpleasant surprise if you have a claim. The insurance company will reduce your reimbursement, potentially leaving you with significant out-of-pocket costs.
Using the example above, here’s how the penalty often works:
The $600,000 figure listed in the policy is 75% of the required $800,000.
If a kitchen fire caused $400,000 in damage, the insurance would pay $300,000 ($400,000 x 0.75) less the deductible.
In contrast, if you had insured the required value of $800,000, you would have received $400,000 less the deductible.
Your out-of-date valuation would cause $100,000 in extra out-of-pocket costs.
An accurate valuation is crucial to avoid a coinsurance penalty.
One of the roles of a broker is to run third-party software (such as Marshall & Swift) to provide annual guidance on replacement cost. The software analyzes variables such as geography, construction type, square footage, and so forth, to provide a benchmark on replacement cost.
Also, check with your broker to find out if your policy requires replacement cost valuation appraisals at specific intervals. For example, Florida statute 718.11 (11a) says, “The replacement cost (for condominium buildings) must be determined at least once every 36 months.
Further, review your property insurance policies for “margin clauses.” A margin clause limits the amount you can collect for a loss at a given location to a specified percentage of the reported values for that location.
For example, suppose a policy has a 120% margin clause. Fire destroys a building valued in the insurance policy at $2M. The maximum settlement you could receive is $2.4M (120% of $2M). If your replacement cost valuation is out-of-date, the maximum settlement would be 120% of the out-of-date figure.
Some policies have both a coinsurance clause and a margin clause. This means you could face both a coinsurance penalty and a margin limitation. Ask your broker to walk through hypothetical loss scenarios to demonstrate how your policy structure works. If it doesn’t provide the level of protection you want, you and your broker can discuss alternatives.
By staying informed and proactive, you can effectively manage your commercial property insurance policies, so you have the resources to recover from a catastrophic event and safeguard your investments.
Navigating property insurance requires careful attention to valuations, coinsurance clauses, and market conditions. Our Real Estate team works directly with you to evaluate whether your limits align with current risk exposures. For more information on protecting your real estate investments, you can reach a specialist through our secure form or by emailing realestate@risk-strategies.com.
For more than 25 years, Marshall Heron has been collaborating with commercial real estate investors, developers, and owners to design insurance and risk management strategies. He specializes in finding innovative solutions for complex real estate exposures.