The factor used to complete the penalty calculation and determine how much of the loss the insurance company will pay is as follows: the amount the building was insured for, divided by the amount the building should have been insured for, multiplied by the amount of the loss, minus the policy deductible.
So, for example, assume a building should be insured for $100,000, but the insured chooses to insure it for $70,000 with a $500 deductible. $70,000 is 70% of $100,000, so the 80% co-insurance requirement has not been met. Say our hypothetical building suffers a $5,000 roof damage claim.
Co-Insurance Penalty and Policy Deductible
Since the building was under-insured, the insurance company will use the calculation (70,000/100,000) X $5000 - $500. In this scenario, the insurance company will pay the insured $3,000 for the roof damage and the insured will be responsible for the additional $2,000 which is the amount of the co-insurance penalty and the policy deductible.
Straight Depreciated Value
The insurance company may also pay the loss based on the straight depreciated value. So, in this example, a $5000 roof claim on a 30-year-old shingle roof could be deemed 50% depreciated and your payment would be $2000 after the deductible is applied.