Property Insurance
Core Concepts
Property insurance protects against physical damage to or loss of property. Candidates must understand the different bases of valuation: actual cash value (ACV), replacement cost, and agreed value. Co-insurance clauses require the insured to carry insurance to a specified percentage of the property's value (e.g., 80%, 90%, or 100%) to avoid a penalty on partial losses. The co-insurance penalty formula is: (Amount carried / Amount required) × Loss = Claim payment, subject to the policy limit. Other key concepts include deductibles, policy limits, and exclusions such as wear and tear, deterioration, and inherent vice. Additional coverages like debris removal, business interruption, and by-laws coverage may be included. For commercial property, the concept of average (or co-insurance) applies similarly. In Quebec, the Civil Code governs insurance contracts, and the concept of "dommages" includes direct and indirect losses.
Traps in Questions
A frequent trap is misapplying the co-insurance formula: the penalty applies only when the amount carried is less than the required amount, and the payment is reduced proportionally. Also, watch for questions about the "pair and set" clause, which limits recovery for lost items that are part of a set. Another trap is the treatment of by-laws coverage, which pays for increased costs due to building codes after a loss.
Worked Example
A building valued at $1,000,000 is insured for $700,000 with an 80% co-insurance clause. A loss of $100,000 occurs. Required insurance = 80% × $1,000,000 = $800,000. Since $700,000 < $800,000, the penalty applies: ($700,000 / $800,000) × $100,000 = $87,500. The insured bears $12,500.
Rule of Thumb
Always calculate the required amount first (percentage × value at time of loss), then compare to the limit carried. If carried ≥ required, no penalty.