The Warehouse Insured at 60% of Value
A commercial building and personal property form covers a 40-year-old warehouse. The policy carries an 80% coinsurance clause, a $600,000 building limit, a $5,000 deductible, and replacement-cost settlement. At the time of loss the building would cost $1,000,000 to replace, and its actual cash value is $550,000. A fire causes $200,000 in replacement-cost damage; the depreciated value of the damaged property is $150,000. The insured tells you he does not intend to rebuild - he plans to take the money, sell the lot, and retire. He argues that because he insured for $600,000 he should get "60% of his loss and nothing more," but that paying him only depreciated value is "an insult."
1. Calculate the replacement-cost settlement and the actual-cash-value settlement, showing the coinsurance arithmetic.
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Coinsurance compares the limit carried with the limit required:
- Required = 80% × $1,000,000 = $800,000
- Carried = $600,000
- Ratio = 600,000 ÷ 800,000 = 0.75
Replacement-cost settlement (if he repairs): $200,000 × 0.75 = $150,000, less $5,000 deductible = $145,000. Compare to the limit - $145,000 is far below $600,000, so no cap.
Actual-cash-value settlement (no repair): $150,000 × 0.75 = $112,500, less $5,000 deductible = $107,500.
Note what coinsurance does not do: it does not reduce the policy limit, and it does not give the insured credit for insuring at 60% of value. Carrying $600,000 on a $1,000,000 building bought a 25% penalty on this loss, not a pro-rata reward.
2. The insured says he will not rebuild. Which number governs, and what policy condition drives that?
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Without repair or replacement, the replacement-cost condition is not satisfied and he is limited to actual cash value: $107,500.
His "60% of my loss" theory inverts the clause. Sixty percent is his limit-to-value ratio; the coinsurance percentage (80%) sets the required amount, so the fraction actually applied is 75%.
Document: (a) the loss-settlement condition and any deadline to complete repair (commonly 180 days after the loss - confirm the form), (b) his written statement of intent, and (c) his option to claim ACV now and reopen within the allowed period if he changes his mind. If he does rebuild, the $37,500 difference between $145,000 and $107,500 can be released on completion.
Also check ordinance-or-law coverage before he rebuilds - code upgrades on a 40-year-old warehouse are frequently the difference between a settlement he accepts and a complaint.
3. How would the answer change if the policy had been written with an Agreed Value of $1,000,000?
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An Agreed Value suspends the coinsurance condition: the parties have already agreed that $1,000,000 is the value, so no proportional reduction applies. But Agreed Value does not raise the limit of insurance.
- Repairs: $200,000 − $5,000 = $195,000, still subject to the $600,000 limit (not reached).
- No repair: $150,000 − $5,000 = $145,000.
So the insured collects $50,000 more than under the coinsurance form and suffers no penalty for the underinsurance - which is exactly why Agreed Value is underwritten and priced, and why you verify the declarations page instead of assuming the clause. If the limit itself had been $150,000, payment would have been capped at $150,000 less the deductible regardless of the Agreed Value.