Insuring Commercial Property: Why Machine Shops Need to Understand Coinsurance

As a machine shop owner, it is extremely important to understand the role of coinsurance in your current commercial property insurance contract. Not know what your coverage requirements could really set you back in the event of a major claim.

Let's take a look at what coinsurance could mean for you. I'll start with the definition and formula and will move into a few examples.

Property Coinsurance Formula, If Carried Insurance is Less Than the Required Insurance

Amount of Recovery = Value of Loss x Amount of Carried Insurance/Amount of Required Insurance – Deductible

Property Coinsurance Formula, If Carried Insurance is Greater Than or Equal to the Required Insurance

Amount of Recovery = Value of – Deductible

Example # 1

Aaron Peacock’s Machine Corp of Boone North Carolina partially insures a property worth $700,000 for $495,000. The policy requires 100% of its value to be insured (aka 100% coinsurance) for full coverage, and has a $5000 deductible. Since the amount of insurance the company should have carried is 1.0 X $700,000 = $700,000 we will use that number in the denominator of our equation. If Aaron Peacock’s Machine Corp suffers a $100,000 loss the formula would work like this to figure out how much the company will receive from the insurance company:

$100,000 x $495,000/$700,000 - $5000 = $65,714.29

Example # 2

Peacock Tool Company in Hickory North Carolina insures their property for $650,000 and their building is valued by ISO at $700,000. They have a 90% coininsurance clause in their contract which means they need to be insured to at least to 90% of the replacement cost of $700,000. Here is the formula if Peacock Tool Company has the same $100,000 claim and they also have a $5000 deductible:

$100,000 - $5000 = $95,000

Notice that we did not multiply the coinsurance penalty to the claim amount. This is because $650,000 satisfied the minimum limit required which in this case is $630,000 ($700,000 [replacement cost] x .9 [90% coinsurance requirement from contract])

It’s important to know that the building value is determined at the time of a claim by a 3rd party organization.


Aaron is fantastic at explaining important coverages. I feel well protected and can sleep much better at night knowing what I have insured.

David Lytle

Universal Machine, Marion NC

About Me

Feel free to reach out. My email is or call 828-434-3215. My office is in Boone NC and I service the North Carolina counties of Watauga, Wilkes, Avery, Ashe, Alleghany, Mitchell, McDowell, Caldwell, Catawba, and Burke. I can sell life insurance nationwide. Please contact me with any questions.
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Aaron Peacock

Aaron Peacock

Hi, I'm Aaron and I'm a marketing representative for Federated Mutual Insurance Company - a Ward's Top 50 and an A.M. BEST A+ Superior rated insurance carrier. After my wife was severely injured in an accident involving a distracted driver, I've found one of my passions in life is to help educate people about the Danger of Distracted Driving and have started speaking to businesses in Western North Carolina on implementing the Federated Insurance DriveS.A.F.E. program. Click here to read more...