Commercial co-insurance can be described as the amount of insurance purchased divided by the amount required and multiplied by the amount of the loss to find the amount of the insurance claim they can receive.
For example, a commercial building with a value of $500,000 and an 80% co-insurance clause must be insured for $400,000 to meet the policy requirements. If the policyholder only purchased a coverage limit of $300,000 and suffered a $100,000 loss, the insurance company would only be required to pay $75,000 of the loss. The risk's underinsured percentage would reduce the claim payout.
Here's the above example expressed as a formula:
(Coverage Limit Purchased) ÷ (Required Coverage Limit) X (Amount of Loss) = (Payout)
$300,000 ÷ $400,000 X $100,000 = $75,000
In this example, $300,000 is the coverage limit the policyholder purchased. $400,000 is 80% of the building's value. $100,000 is the amount of the loss, and $75,000 is the amount of compensation they are eligible to receive.