Property Insurance Basics: Reading the Policy Structure
Anatomy of a property policy
Every property form contains declarations (who, what, where, how much), an insuring agreement (what is covered and for which perils), conditions (duties after loss, appraisal, salvage, mortgagee rights), exclusions, and definitions. Covered property is described precisely - building, business personal property, personal property - because items outside that description are not covered no matter how valuable.
Perils and valuation
Named-peril forms list the causes of loss covered; open-peril (special) forms cover all risks of direct physical loss except those excluded. Valuation drives the settlement: actual cash value, replacement cost, or agreed value. Coinsurance clauses require the insured to carry a stated percentage of the property's value or share the loss.
Key coverages and conditions
The mortgagee (loss payable) clause protects the lender's interest even if the insured's own conduct voids coverage. Additional coverages - debris removal, preservation of property, collapse, pollutant cleanup - come with their own sublimits. Business income covers lost earnings and continuing expenses during restoration. Flood and earthquake are excluded under standard forms and require separate coverage; flood is written through NFIP or private carriers.
Worked example (coinsurance): A building has a replacement cost of $1,000,000, and the policy requires 80% - $800,000. The insured carries $600,000. A covered loss is $200,000, deductible $1,000. Recovery = (600,000 ÷ 800,000) × 200,000 = $150,000, minus the $1,000 deductible = $149,000.
Trap: coinsurance applies when a loss occurs, and it measures against the value at the time of loss - not against the policy limit or market value.