Insured at 70% of Replacement Cost, a $50K Fire Only Pays Out $43,750

The penalty that surprises people on a partial loss, not a total one

We ran a common underinsurance scenario through the calculator: a $400,000 replacement cost home insured for $280,000 — 70% of its rebuild cost, below the standard 80% coinsurance requirement. A $50,000 kitchen fire, which the homeowner assumes is “obviously covered” since it’s well under their $280,000 policy limit, actually pays out only $43,750. The coinsurance formula reduces the payout in direct proportion to how underinsured the home is, regardless of whether the loss itself exceeds the policy limit.

This is exactly backwards from most people’s intuition about insurance: they expect the penalty to bite on a catastrophic, near-total loss, when in fact catastrophic losses are the case where the coinsurance penalty matters LEAST (the policy limit caps the payout either way). It’s the everyday partial loss — the kitchen fire, the storm-damaged roof — where underinsurance quietly costs real money.

How the math works

Required insurance = coinsurance % × replacement cost. Coinsurance ratio = min(1, insured amount ÷ required insurance) — capped at 1, since insuring above the requirement doesn’t increase the payout beyond the actual loss. Payout = min(insured amount, loss amount × coinsurance ratio).

Source: standard ISO (Insurance Services Office) coinsurance clause methodology, used broadly across the US property insurance industry — though the exact coinsurance percentage (commonly 80%, sometimes 90% or 100%) is set by each specific policy.

Math runs locally. Inputs never leave your browser. Source on github.

Where this calculation doesn’t apply

• The policy has no coinsurance clause. Some policies — particularly “guaranteed replacement cost” or “extended replacement cost” policies — waive the coinsurance requirement entirely. Check your specific policy language.
• Replacement cost is genuinely hard to estimate. Construction costs vary by region and change over time — a professional replacement-cost estimate (many insurers provide one) is more reliable than a rough guess, and using a stale figure can understate how underinsured a home actually is.
• The loss is for contents, not the dwelling. Personal property/contents coverage typically has its own separate limit and doesn’t always carry the same coinsurance mechanics as the dwelling coverage this tool models.
• State-specific rules override the standard formula. A few states regulate or restrict coinsurance clauses differently — check your state’s specific insurance regulations if something here doesn’t match your policy.

What to actually do

1. Get a current, professional replacement-cost estimate — construction costs rise over time, and an old estimate likely understates the real number.
2. Check your policy’s declarations page for both the coinsurance percentage and your actual dwelling coverage limit.
3. If underinsured, raise your dwelling coverage to at least the coinsurance requirement — this is usually a modest premium increase relative to the exposure it closes.
4. Ask your insurer about an inflation-guard or extended/guaranteed replacement cost endorsement, which can reduce or eliminate future coinsurance risk as costs rise.
5. Revisit this after any major renovation, which can meaningfully change the true replacement cost.