Since the insured lived up to only six-eighths of the coinsurance bargain, he will recover only six-eighths of the loss and be a coinsurer on the other two-eights. If, on the other hand, the insured had purchased $80,000 of coverage, the entire $20,000 loss would have been covered. If the insured had purchased the required amount of insurance ($80,000), the formula would have provided recovery for the full loss.

Complying with the typical coinsurance clause (80 percent) does not guarantee that the insured will receive full recovery on a total loss if the amount of the loss exceeds the limit of liability. The clause sets only the minimum amount of insurance required. If the insured suffers a total loss and is insured to exactly 80 percent of the actual cash value of the covered property, he must still look to his own resources to cover the uninsured 20 percent. The insured always has the option of insuring 100 percent of the property's value, even though the coinsurance clause may require only 80 or 90 percent coverage.

 When the Deductible Applies

 The commercial property forms in use since 1986 apply the deductible after the calculation of the coinsurance penalty. This is in contrast to the pre-1986 forms. Those forms applied the deductible prior to calculating the coinsurance penalty, which is more advantageous to the insured. The following examples are illustrative.

For a more complete explanation of the application of the deductible, seeBuilding and Personal Property Coverage Form.

 Coinsurance Affirmed by Courts

 The concept of coinsurance and the several wordings of coinsurance clauses are well accepted in the insurance industry. This acceptance is supported by court cases dating back many years that show coinsurance clauses to be valid in common law and well accepted by the court system unless specifically prohibited by state statute.

 A Missouri case, Templeton v. Insurance Co. of North America of Pennsylvania, 201 S.W. 2d 784 (Mo. App., 1947), affirms the general acceptance of coinsurance and illustrates its relationship to state law. After a loss, Templeton faced a sizable coinsurance penalty. He argued that even if the coinsurance clause was valid under common law, state statute prohibited its application. Actually there were two state statues, which on their face, appeared to be contradictory. The first, written in 1893, allowed only coinsurance clauses in fire policies that covered personal property in cities with populations larger than 100,000. In 1919 the legislature passed another statute that allowed coinsurance clauses to be included in fire policies in return for a rate reduction. The Missouri Court of Appeals decided that in requiring a rate reduction in exchange for the coinsurance clause, the second statute merely limited the first and did not contradict it. The court recognized that, in the absence of state law prohibiting it, coinsurance was valid at common law.

 Home Ins. Co, N.Y. v. Eisenson, 181 F.2d 416 (5th Cir. 1950) discusses the coinsurance clause in a business interruption policy. In upholding the validity of the coinsurance clause, the court both set forth the rationale for including a coinsurance clause in an insurance policy and recognized that the clause could be overridden by state statutes. The court stated,

 In short, coinsurance clauses are designed to compel the insured, either as self insurer or otherwise, to carry insurance on the risk in an amount equal to the percentage of its value fixed by the particular clause. Though such clauses are generally held enforceable in the absence of a statutory prohibition to the contrary, they are entirely prohibited by statute in some jurisdictions, greatly restricted in others, and subject in all to a strict construction and the requirement of strict proof.

 One state statute that has often been used in attempts to invalidate the coinsurance clause is the valued policy law. Valued policy laws were enacted primarily to protect insureds from overinsuring their property, only to collect a lesser amount upon its total destruction; see[IDL:Valued Policy Laws.xml^"Valued Policy Laws," Fire & Marine, Misc. Property section^Valued Policy Laws]. On the other hand, coinsurance clauses are designed to encourage insureds not to underinsure their property.

 Despite these opposing purposes, in cases such as Donner v. Equitable Fire & Marine Ins. Co., 102 So. 2d 86 (La. App., 1958) insureds have invoked valued policy laws to show that they should not be coinsurers with insurance companies on underinsured losses. In this case the Louisiana valued policy law stated,

 Whenever any policy of insurance against loss by fire is written…on property immovable by nature and situated in this state, and the said property shall be either partially damaged or totally destroyed…the value of the property as assessed by the insurer…at the time of the issuance of the policy shall be conclusively taken to be the actual cash value of the property at the time of damage or destruction.

 In Donner, the Louisiana Court of Appeal quoted counsel from an earlier case, Simon v. Queen Insurance Company, 45 So. 396 (La. App., 1907), in deciding against the insured:

 Thus it will be seen that not only is the stipulation for coinsurance legal, but that the further stipulation of failing to secure coinsurance on the amount agreed on would make the insured a coinsurer for such deficit has also been held to be legal. Standard policies in general in this country provide for coinsurance, and lower rates are obtained by insurers by reason thereof than would otherwise be obtained. There could, of course, be no discussion on this point, but for the statute known as the 'Valued Policy Act'…It was not intended to—nor does it—prevent the insured from himself becoming by actual agreement with insurers a coinsurer for certain amount of damages. That is a matter which is purely personal, and is in no way against public policy, and does not contravene the statute in question.

 The Louisiana valued policy law referred to in Donner applied to both partial and total losses. However, most states' valued policy laws apply only to total losses, which render the issue of coinsurance moot. Coinsurance is irrelevant in total losses because the application of the coinsurance penalty formula generates a value higher than the limit on the policy. Using the example presented on a previous page, a total loss would be

 $100,000 covered by a policy with a $60,000 limit:

Since the amount recovered yielded by the coinsurance penalty calculation is greater than the policy limit, the insured's recovery for the loss is the policy's limit of $60,000.

 Other statutes can affect the validity of a policy's coinsurance clause. For instance, Surratt v. Grain Dealers Mut. Ins. Co., 328 S.E.2d 16 (N.C. App., 1985) referred to a statute that prohibited the use of a coinsurance clause in a homeowners policy unless "there is printed or stamped on the filing face of such policy or on the form containing such clause the word 'coinsurance contract.'" An Oregon court of appeals, in Schnitzer v. South Carolina Ins. Co., 661 P.2d 550 (Ore. App., 1983), upheld the insurance company's right to benefit from its coinsurance clause in a fire policy because it had complied with a statute requiring that "any provision restricting or abridging the rights of the insured under the policy must be preceded by a sufficiently explanatory title printed or written in type not smaller than eight-point capital letters." The court agreed with the insured that the coinsurance clause restricted or abridged the right of the insured, but the insurance company had been wise enough to print the clause in eight-point capital letters.

 Establishing a Value for Coinsurance

 It is often a difficult task to assign a value to insured property. Often this difficulty results in a dispute at claim time when applying the coinsurance clause. When insurance agents or insurance company employees participate in the property valuation, the doctrine of equitable estoppel is sometimes invoked by insureds to prevent insurers from applying the coinsurance penalty to a loss. According to a United States district court judge, the doctrine of equitable estoppel "is intended to prevent a party from denying the truth or accuracy of that which he had previously asserted, or from assuming a position which is inconsistent with that which he had previously taken" (Freil v. National Liberty Insurance Company of America, 71 F. Supp. 761 (D.C. Pa., 1947)).

 First Regular Baptist Church of Franklin, Ohio v. Insurance Co. of North America, 444 F.2d 279 (6th Cir. 1971) illustrates the circumstances that may bring the doctrine of equitable estoppel into play. A fire insurance policy containing a 90 percent coinsurance clause was written for a church. With the approval of the church trustees, the value of the church was established by the insurance agent (who was a member of the church) and a special agent of the insurance company who was experienced in insurance appraisals of buildings. The coverage was written at the appraised value. Several months later, a fire partially damaged the church. Because the parties were unable to agree on the amount of the loss, the question was submitted to appraisal. They established a total value for the church at the time of the loss to be 36 percent higher than the value recommended by the insurance agent and the insurance company special agent. Based on the appraisal, the insurance company imposed a 26 percent coinsurance penalty on the loss settlement. In response the church argued that "the insurer was estopped to invoke the 90percent coinsurance clause because it had appraised the sanctuary too low and had used the appraisal in fixing the face amount of the policy."

 In deciding against the church, the court said that it was the church who contested the original appraisal and not the insurance company. The court pointed out that the church said the policy limit should have been set at the higher appraisal, yet it paid no premium for the greater amount of coverage. Furthermore, there was no evidence that the insurance agent or the special agent for the insurance company was negligent in making the appraisal or that either one made a mistake. Nor was there evidence that the church trustees were ignorant, or that they were imposed on by the representatives of the insurance company.

 Finally, the court said, "In order to constitute equitable estoppel in Ohio, there must exist a false representation or concealment of material facts, and it must have been made with knowledge, actual or constructive, of the facts. No estoppel will arise where the representation of conduct of the party sought to be estopped is due to ignorance founded on an innocent mistake."

 It may seem unfair that the party who is supposedly the greater expert (the insurer) can make a mistake, allow the other party (the insured) to rely on it, and then benefit from its own mistake. Still the coinsurance clause was not vitiated by the doctrine of equitable estoppel in at least one other case that has passed the test of time: Friel v. National Liberty Insurance Company of America, cited previously. However, the facts were different in Friel: two years and four months had passed from the time the insurance company's agent gave an estimate on the value of the building until the time of the loss. The judge pointed out that considerable inflation had taken place during that time and that it was the responsibility of the insured to keep the insurer apprised of increases in the property's value.

 One final note: today most agents shy away from setting property values or, if they do, they make sure that the insured understands that it is still his responsibility to establish the ultimate value of any building. In fact, one insurer's homeowners policy tells the insured: "You are responsible for selecting the appropriate amount of coverage."

 Buildings and Personal Property

 The operation of the coinsurance clause in property insurance policies makes it imperative that the insured property be correctly distinguished between personal property (or contents) and buildings. A 1966 Louisiana case, Hilltop Bowl, Inc. v. United States Fidelity & Guaranty Co., 248 F. Supp. 572 (D.C. La., 1966), demonstrates the consequences of not drawing the proper distinction. In this case, the proprietor of a bowling alley assumed that the bowling lanes he installed in a leased building were part of the building. As with many business enterprises, two corporations were set up: Hilltop Realty, Inc., to own and operate the building, and Hilltop Bowl, Inc., to own and operate the bowling lanes. The building was insured for $120,000 on one policy and the contents for $115,000 on another policy, for a total amount of insurance of $235,000 at 100 percent coinsurance between the two policies.

 A partial fire loss in the building triggered a dispute between Hilltop Bowl, Inc. and the insurance company over the size of the loss. An appraisal, conducted under the terms of the policy, determined that the building was worth $64,940, the contents $103,665, and the bowling lanes $58,274, for a total of $226,879. From this appraisal it was apparent that if the bowling lanes had been included with the contents, the contents loss would have been $161,939 and Hilltop Bowl would have been underinsured by 29 percent. On the other hand, if the lanes had been included with the building, the building loss would have been $123,605 and Hilltop Bowl would have been almost fully covered. The United States District court found that, under Louisiana law, the bowling lanes belong with the contents and Hilltop Bowl, Inc. collected $22,863 less than it would have had the lanes been ruled part of the building.

 The Louisiana Court of Appeals found for the insured in a somewhat different case, Atlas Lubricant Corp. v. Federal Ins. Co. of New Jersey, 293 So. 2d 550 (La. App., 1974). In this case, the dispute was over whether sixty-six outside oil storage tanks should be included in the policy's building and contents coverage. Had the outside tanks been included in the description of covered property, the coinsurance penalty would have been triggered to the substantial detriment of the insured. The policy description of insured property read, "On the one-story, frame, approved roof warehouses; 1, 3, 5, and 7 pump house; paint house, lunch house; boiler house; tanks & structures and oils and machinery equipment located at 200 First Street." Since there were also tanks inside buildings, the court ruled that the policy was ambiguous and, as such, should be construed most strongly against the insurer. The court upbraided the insurance agent for not writing a clearer description of the insured property and even speculated that the agent might be liable to the insurance company for the amount of insurance it paid out.