This is a crucial answer to understand because it's exactly where many policyholders get confused and cannot receive the insurance compensation they were expecting after they file a claim. It's easy to see where the misunderstanding comes in—if your loss is less than the coverage limit, you may assume that the full amount of the claim will be paid, but that's not the case with co-insurance.
In the example formula listed above, the policyholder files a claim for a $100,000 loss, which is well below their policy's $300,000 coverage limit. However, because the total value of the building is $500,000, the $300,000 coverage limit falls short of the 80% coverage limit required by the commercial co-insurance clause since 80% of $500,000 is $400,000. $300,000 divided by $400,000 is 0.75, meaning the policyholder only has 75% of the coverage limit amount they should have. The amount that the policyholder is underinsured is the amount their claim will be reduced by. As a result, they are only eligible to receive an insurance payout of 75% of the amount of the claim, or in this case, $75,000—regardless of the fact that the amount of the loss is less than the coverage limit they purchased.