Coinsurance Math on a Sprinkler-Pipe Loss
Precision Tool & Die owns a machining building insured under a commercial property form with a $1,000,000 building limit, an 80% coinsurance clause, a $10,000 deductible, and replacement cost coverage. A sprinkler pipe failure damages roof decking, ceiling grid, and two CNC machines. The agreed repair estimate is $300,000 replacement cost; depreciation on the damaged components is $90,000, making actual cash value $210,000. A full replacement-cost appraisal of the entire building is $1,500,000. There are no ordinance-or-law or debris issues. The insured intends to repair and the CFO insists that coinsurance "is just another way of stating the limit" and demands $290,000.
1. Compute the required insurance amount, the coinsurance ratio, and the payment on a replacement cost basis.
Read the worked answer
Step 1 - required limit: 80% × $1,500,000 = $1,200,000.
Step 2 - ratio carried: $1,000,000 ÷ $1,200,000 = 0.8333 (83.33%). The insured is a coinsurer for the 16.67% gap.
Step 3 - apply ratio to the loss: $300,000 × 0.8333 = $250,000.
Step 4 - apply the deductible: $250,000 − $10,000 = $240,000 payable on a replacement cost basis, subject to proof of repair.
The CFO's $290,000 figure ignores the coinsurance clause entirely; the clause limits recovery even though the loss is well below the limit. (Some forms sequence the deductible before the ratio, which changes the arithmetic by a small amount; either way the coinsurance penalty applies and the CFO's approach is wrong.)
2. Explain how the claim should actually be paid out, including the ACV advance and the recoverable depreciation, with numbers.
Read the worked answer
Replacement cost coverage pays in two stages. The initial payment is on an actual cash value basis, reduced by coinsurance and the deductible: $210,000 × 0.8333 = $175,000; $175,000 − $10,000 = $165,000 advanced.
The withheld recoverable depreciation is the difference between the RCV payment and the ACV payment: $240,000 − $165,000 = $75,000, released when the insured completes the repairs and documents the actual spend, up to the amount actually spent and the policy limit.
If the insured does not repair (for example, sells the building or elects not to replace), the withheld amount is not owed and the claim settles at the ACV figure. The adjuster should tell the client this now, in writing, so the decision to repair is informed rather than assumed.
3. The CFO proposes telling the insurer the building's replacement cost is $1,200,000 so the ratio reaches 100%. How should the public adjuster handle it?
Read the worked answer
Refuse flatly. The replacement cost figure is a material fact in the valuation of the risk and the claim; understating it to defeat a coinsurance penalty is a willful misrepresentation. Illinois law voids coverage for willful concealment or misrepresentation of a material fact in the standard fire policy language, and a false statement in support of a claim also carries insurance fraud exposure.
The defensible path is to argue the valuation itself with evidence - a contractor's replacement cost estimate, Code-required upgrades, or an appraisal - and, if the parties cannot agree, use the appraisal provision. The adjuster may also explore whether the client should increase the limit prospectively so the next loss is not penalized. What the adjuster may not do is submit a number he knows is false, even if the client directs it.