ITV gap widens, as co-insurance clauses catch businesses off-guard

After recent catastrophes including the 2024 Jasper wildfire, the insurance-to-value conversation has sharpened, particularly for commercial property policyholders facing increased rebuild costs and co-insurance clauses they may not fully understand, says the Insurance Bureau of Canada (IBC).

IBC’s consumer information centre receives about 25,000 inquiries annually, says Rob de Pruis, IBC’s national director of consumer and industry relations. Many come from claimants asking if their co-insurance penalties sound right.

“We do hear about that quite often, and we heard about it quite a bit in Jasper after the fire,” de Pruis tells Canadian Underwriter.

In business insurance, a co-insurance clause is analogous to a deductible in a personal home insurance policy. It’s a way for insurance companies to share risk with their commercial insureds.

Essentially, the policyholder agrees to maintain a certain level of insurance coverage of the property’s value, as BrokerLink explains on its website. Usually, the percentage is fixed at 80%, 90% or 100% of the commercial property’s value.

If the policyholder insures for less than this agreed-upon percentage, they may face a penalty, and their claim payout will be reduced accordingly

Many business owners don’t fully understand the impact of their policy limit decisions, de Pruis says. In some circumstances, “small businesses finding themselves in that particular situation of underinsurance might be forced to close because they’re financially responsible [for the losses].”

But measuring the scale of the insurance-to-value problem is difficult, he adds, since insurance policies are legal contracts and the data isn’t made public.

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Biggest misconceptions

For homeowners, insurers and brokers often use replacement cost calculators based on property details such as size and finishings. “That same calculator tool is not available for businesses,” de Pruis says, given the complexity of commercial properties.

Instead, it’s up to business owners to estimate building values and select policy limits.

“Most business owners are not valuation and replacement cost experts,” says de Pruis, adding that business clients should be encouraged to obtain independent appraisals.

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“A lot of businesses are looking for ways to reduce their premium. What they may choose to do is reduce their policy limit,” he says, “But there are consequences to that in a claim situation.”

Some businesses knowingly accept the risk. Others don’t understand it, only to discover they’re underinsured during a claim, de Pruis says. The wrong decision could “essentially cause the business to become bankrupt”.

Co-insurance clauses become a major risk if limits don’t match true replacement cost, he explains. “A lot of businesses misunderstand their co-insurance clause. They wrongly assume losses will be fully covered if they fall within policy limits.”

For example, if a building should be insured for $1 million but carries $700,000 in limits, “you’re only insuring 70%,” he says. “Even if it’s a partial loss, the insurance company will only pay 70% of that claim.”

Using this example, many businesses assume a $100,000 loss would be fully covered because it falls below the policy limit. “That’s not correct,” de Pruis warns. The insurer would pay $70,000, leaving the business responsible for the rest.

Tariffs and inflation push rebuild costs higher

Rising rebuild costs are widening insurance-to-value gaps, de Pruis says. Tariffs are adding uncertainty, but they’re only one of several drivers impacting replacement values.

Since 2019, consumer inflation has increased to just over 20%. But rebuild costs in some areas have climbed more than 80%.

Skilled labour shortages are also pushing up costs and delaying reconstruction, de Pruis says.

Severe weather continues to add pressure, too. Canada recorded 17 catastrophe events in 2025, though they did not strike major population centres in the same way the 2024 disasters did.

Increasing awareness

One reason underinsurance persists is because many policyholders don’t review their coverage until a claim forces the issue, de Pruis says. “Anecdotally, we’ve heard from people that they spend more time researching a one-week vacation than they do researching and understanding their insurance policy.”

Brokers play a key role in insurance literacy by encouraging appraisals and explaining co-insurance risks, de Pruis says.

“I think the industry is already doing what we can, but there’s always more work that can be done to increase awareness,” he says. “You can’t force people to make this important, but you can highlight the risks to help them make an informed decision.”