How Can Co-Insurance Affect a Commercial Property Claim?
A co-insurance rule can reduce the amount you get paid after a commercial property claim.
For example, you could have a CAD 400,000 covered loss and receive only CAD 300,000, before the deductible and other policy rules.
Here is why.
How does co-insurance work?
A co-insurance rule says you must insure your building for at least a set percentage of its value. That might be 80% or 90%.
For example, say your building costs CAD 1,000,000 to rebuild and your policy has an 80% co-insurance requirement.
Amount | |
|---|---|
Building replacement cost | CAD 1,000,000 |
Co-insurance requirement | 80% |
Required amount | CAD 800,000 |
Amount insured | CAD 600,000 |
Covered loss | CAD 400,000 |
You needed at least CAD 800,000 of insurance but only had CAD 600,000.
The co-insurance calculation is:
CAD 600,000 ÷ CAD 800,000 = 75%
The insurer pays:
75% × CAD 400,000 = CAD 300,000
You pay the other CAD 100,000 yourself, before the deductible and other policy rules.
Does co-insurance apply to partial losses?
It can.
Co-insurance is not only about a total building loss.
If the rule applies and you do not have enough insurance, it can reduce the payment on a partial loss too.
The exact calculation depends on your policy.
Where do you find the co-insurance requirement?
The co-insurance percentage is usually shown on the policy declarations page, next to the building limit.
The full rule is in the policy wording.
The details can be different from one policy to another.
For example, Intact Insurance’s commercial Building and/or Contents Broad Form (BF02, June 2025 edition, special provision 2) requires insurance of at least the co-insurance percentage multiplied by the value of the property.
Where its replacement cost extension applies, the co-insurance calculation is based on a replacement cost valuation.
Other policies can have different rules, loss limits or ways to waive co-insurance.
Your policy wording controls.
Meeting the co-insurance requirement does not mean you are fully insured
Say your building is worth CAD 1,000,000 and your co-insurance requirement is 80%.
You carry CAD 800,000.
You have met the 80% requirement. In the example above, the co-insurance rule would not reduce the CAD 400,000 loss.
But you still only have CAD 800,000 of insurance.
If the building is destroyed and costs CAD 1,000,000 to rebuild, a CAD 800,000 limit cannot provide more than CAD 800,000 toward the rebuild, subject to the policy’s terms and limits.
Avoiding a co-insurance penalty is not the same as having enough insurance to rebuild the building.
How can rising construction costs create a co-insurance problem?
Your insurance limit can stay the same while your building’s replacement cost goes up.
Say your building costs CAD 1,000,000 to rebuild and you have CAD 800,000 of insurance.
That meets an 80% co-insurance requirement.
Now suppose the replacement cost rises 10%, to CAD 1,100,000.
The new required amount is:
80% × CAD 1,100,000 = CAD 880,000
Your CAD 800,000 limit is now below the required amount.
On the same CAD 400,000 covered loss:
CAD 800,000 ÷ CAD 880,000 × CAD 400,000 = about CAD 363,636
You would have about CAD 36,364 of the covered loss left to pay yourself, before the deductible and other policy rules.
Nothing about your insurance limit changed.
The replacement cost changed.
Why is general inflation not enough?
Construction costs do not always rise at the same rate as general prices.
From 2020 to 2025, the cost of building non-residential buildings in Toronto rose about 49%. Consumer prices in Toronto rose about 20%.
In 2022 alone, construction costs rose about 16%, compared with 6.5% for consumer prices.
Sources: Statistics Canada building construction price index and consumer price index. Changes calculated from annual averages.
This means simply increasing an old building value by general inflation may not keep up with that building’s replacement cost.
How can you reduce the risk of a co-insurance penalty?
Insure to the building’s current replacement cost, not just the minimum required by the co-insurance rule.
Keep the value up to date as construction costs and the building change.
Use a valuation of the actual building, rather than an old value adjusted only for general inflation.
Review your policy’s co-insurance rules so you understand how they apply.
Your policy may also have a margin clause, which can limit the amount paid for one location in a different way. See How a Margin Clause Is Calculated.
How Remit helps
Remit prepares insurance replacement cost valuations for commercial buildings.
We look at the building itself and current construction costs to develop the replacement cost value.
Send us the property address to discuss a valuation and how to keep it current.
