C12: Insurance on Property cheat sheet

Property insurance indemnifies the insured for loss of or damage to property from specified perils; it is a contract of indemnity, not a wagering contract, so recovery cannot exceed the actual loss.

Six elements of a valid contract apply: offer, acceptance, consideration (premium), legal capacity, legal purpose, and intention to create legal relations; property policies add the doctrine of utmost good faith.

Utmost good faith imposes a duty of disclosure of material facts on the applicant; material facts are those that would influence a prudent underwriter's decision to accept, rate, or decline the risk.

Misrepresentation and non-disclosure render a policy voidable at the insurer's option; innocent misrepresentation generally permits avoidance, while fraudulent misrepresentation may permit avoidance and retention of premium.

Insurable interest, indemnity, subrogation, and contribution are the four governing principles; subrogation and contribution exist only where indemnity applies and cannot be contracted away in advance in most jurisdictions.

A policy is a personal contract: it does not follow the property on sale unless assignment is consented to in writing, although many jurisdictions provide statutory continuation for a limited period after death or transfer.

Warranties are promissory conditions; breach discharges the insurer from liability for loss occurring after breach, subject to statutory relief for breaches unrelated to the loss.

The contra proferentem rule construes ambiguities against the drafter (the insurer), and coverage clauses are read broadly while exclusions are read narrowly.

Standard policy anatomy: declarations (named insured, location, limits, term, premium), insuring agreement, extensions, exclusions, conditions, statutory conditions, and definitions.

Statutory conditions are prescribed by insurance statute and cannot be varied to the insured's detriment; typical conditions cover proof of loss, notice, appraisal, salvage, abandonment, and termination.

Proof of loss must be furnished within a stated period (commonly 60 days) after the insurer's request, in the form required, with supporting invoices, books, and records.

Notice of loss must be given promptly and in writing; failure is excused only where the insured shows a reasonable excuse and no prejudice to the insurer.

The insurer may repair, rebuild, or replace rather than pay cash; the insured cannot compel a cash settlement where the policy reserves that option.

Abandonment of property to the insurer is prohibited; the insured must protect and preserve property from further damage and may recover reasonable salvage expenses.

Appraisal or arbitration clauses allow either party to demand an independent valuation when the amount of loss is disputed, while coverage disputes remain litigable.

Cancellation terms: the insured may cancel on short notice with a pro rata refund; the insurer may cancel for non-payment or material misrepresentation with statutory notice and a short-rate or pro rata refund as prescribed.

Limitation periods for bringing action are statutory (often one year from the loss or from disallowance) and cannot be shortened by policy wording.

Insurable interest must exist at the time of loss (for property) and means a pecuniary relationship such that the insured benefits from the property's continued existence or suffers loss from its destruction.

Owners, mortgagees, bailees, tenants with leasehold improvements, and parties with legal liability for property all hold insurable interest; expectation of future benefit alone is insufficient.

Indemnity restores the insured to the pre-loss financial position, no better and no worse; valued policies, reinstatement-value endorsements, and agreed-value clauses displace strict indemnity.

Actual cash value (ACV) = replacement cost new minus depreciation; depreciation reflects age, condition, and useful life of the damaged item at the date of loss.

Replacement cost (RC) pays the cost to repair or replace with new property of like kind and quality, subject to a limit and often a requirement to actually repair or replace within a stated period.

Coinsurance clause: recovery = (insurance carried / insurance required) x loss, where insurance required = coinsurance percentage x value at risk; a coinsurance penalty applies only where the limit is below the requirement.

Average (underinsurance) clauses and margin clauses operate similarly to coinsurance but apply to total values rather than a specified percentage.

Pair and set and parts clauses limit recovery where an item is part of a matched set or where replacement of one part restores the whole; the insurer is not obliged to pay for the entire set.

Salvage value and damaged-property proceeds reduce the payable loss; the insurer is entitled to the salvage after paying a total loss.

The standard fire peril covers loss or damage by hostile fire, including scorch, charring, and smoke damage from a hostile fire; friendly fire (confined to its intended place) is not covered.

Lightning coverage includes damage from direct strike and from electrical surge through the structure, even where no fire ensues.

Explosion of natural, coal, or manufactured gas is an allied peril; explosion of steam boilers and pressure vessels is excluded and referred to boiler and machinery coverage.

Removal coverage pays for property removed to protect it from an insured peril, typically for a limited period (commonly 30 days) and subject to a percentage of the policy limit.

Fire department service charges are covered up to a stated limit even where the fire is not at the insured location, provided the charges are legally owed.

The 72-hour clause aggregates all loss from a single fire or explosion event occurring within 72 hours; it prevents stacking of limits across successive events.

Exclusions typical of fire forms: electrical arcing or burnout (unless fire ensues), nuclear hazard, war, intentional acts, and by-laws or ordinance affecting repair.

Pollution cleanup following an insured fire loss is often limited to a sub-limit; uninsured pollution from other causes is excluded.

Extended coverage (EC) perils historically added to fire: windstorm, hail, explosion, riot and civil commotion, aircraft, vehicles, and smoke; vandalism and malicious mischief are often a separate endorsement.

Windstorm coverage typically excludes damage from waves, tidal waves, and water-borne ice, and often applies a separate deductible for named storms.

Water damage endorsements distinguish accidental discharge from plumbing systems (covered) from flood, surface water, and sewer backup (excluded unless endorsed).

Earthquake coverage is written as a separate endorsement with its own limit and a percentage deductible (commonly 2-10% of the limit) and a 72-hour aggregation clause.

Flood coverage is generally excluded from commercial property forms and is provided by government-backed programs or dedicated flood endorsements with separate limits and deductibles.

Additional perils commonly endorsed: sprinkler leakage, collapse, glass breakage, debris removal, crime, and equipment breakdown.

Ordinance or law coverage addresses the increased cost of repairing to current building codes; without it, undamaged portions requiring upgrade are not covered.

Spoilage and contamination endorsements cover loss of perishable stock from equipment failure or power interruption, subject to a waiting period and a sub-limit.

Named-peril forms cover only listed perils; the burden is on the insured to show the loss falls within a listed peril.

Special (all-risk) causes of loss form covers all risks of direct physical loss unless excluded; the insured need only show physical loss, shifting the burden of proof to the insurer for exclusions.

Named-peril forms list covered causes; the insured must establish that the loss arose from a listed peril, and concurrent causation rules may still permit recovery.

Standard exclusions under special forms: ordinance or law, earth movement, water (flood), utility services failure, war, nuclear, intentional loss, and faulty workmanship.

Ensuing-loss rule: excluded causes do not bar coverage for ensuing loss from a covered peril, e.g., faulty workmanship causing a fire.

Building and personal property coverage form (BPP) insures building, business personal property, and personal property of others in the insured's care, custody, or control.

Business income, extra expense, and blanket limits can be added by endorsement; the value reporting form adjusts premium to actual values and applies a reporting-period penalty for underreporting.

Spoilage, newly constructed buildings, and outdoor property are limited or excluded; outdoor signs, fences, and antennas carry sub-limits.

Peak season and vacancy provisions modify coverage; vacancy for a stated period (commonly 60 days) suspends coverage for vandalism, glass, and water damage.

Deductibles may be flat, percentage-based (wind, earthquake), or time-element based for business income losses.

Business income coverage pays net income loss plus continuing normal operating expenses, including payroll, during the period of restoration, subject to a limit and a waiting period.

Period of restoration begins at the time of loss and ends when the property is repaired with reasonable speed or when business resumes at a new permanent location.

Coinsurance for business income: limit required = coinsurance percentage x (net income + operating expenses) for the 12 months following policy inception.

Extra expense coverage pays reasonable costs to avoid or minimize interruption, such as temporary premises, equipment rental, and overtime; it does not require a reduction in business income.

Contingent business interruption covers loss from damage to property of a supplier or customer; civil authority covers loss from government prohibition of access to the insured premises.

Service interruption and utility endorsement covers off-premises power, water, or communications failure, often with a waiting period and a sub-limit.

Extended period of indemnity continues coverage after restoration for a stated period while business returns to normal.

Time-element losses require proof of net income, continuing expenses, and mitigation; payroll is often insured for a limited period (commonly 60 days) under ordinary payroll limits.

Gross earnings and gross profits forms differ in how they define the insurable base; the gross earnings form includes continuing expenses and is common in North American commercial forms.

Crime coverage insures loss of money, securities, and other property from theft, burglary, robbery, forgery, and computer fraud, often with separate insuring agreements and limits.

Fidelity bond (employee dishonesty) covers loss from dishonest acts of employees committed with intent to gain, generally excluding loans, salary, and inventory shortages.

Surety bonds are three-party: obligee (beneficiary), principal (who must perform), and surety (who guarantees performance); they are credit instruments, not insurance, and are recourse-backed by indemnity agreements.

Types of surety bonds: contract (bid, performance, payment), court (fiduciary, appeal), and license and permit bonds.

Discovery versus loss sustained: discovery forms cover loss discovered during the bond period regardless of when committed; loss-sustained forms cover loss during the period and discovered within a stated extension.

Reinstatement of the fidelity limit after a loss may be automatic or require premium; aggregate limits cap the total payable across all losses.

Third-party crime coverage protects against liability for theft or fraud committed by employees against clients, distinct from first-party employee dishonesty.

Social engineering fraud endorsements cover loss from impersonation schemes and are separate from computer fraud coverage, which generally requires unauthorized system access.

Forgery or alteration coverage protects against altered cheques and forged instruments, often with a sub-limit lower than the main crime limit.

Equipment breakdown covers loss from accidental breakdown of pressure vessels, boilers, mechanical and electrical equipment, including motors, turbines, and air conditioning systems.

Covered perils include explosion of pressure vessels, electrical arcing, mechanical failure, and rupture; damage to the object itself and damage to surrounding property are both covered.

Coverage extends to business income and extra expense from an equipment breakdown, often with a separate limit and a waiting period for spoilage.

Exclusions: wear and tear, corrosion, erosion, gradual deterioration, faulty design, and maintenance-related failure; the cause must be an accidental breakdown.

Jurisdictional inspection requirements apply to boilers and pressure vessels; certificates of inspection and compliance with codes are conditions of coverage.

Spoilage coverage under equipment breakdown pays for loss of perishable goods from temperature or humidity change caused by an insured breakdown, often with a waiting period.

Ammonia contamination and hazardous substance cleanup from an insured breakdown may be included by endorsement with sub-limits.

The object limit and the damage limit are distinct; the object limit caps the cost to repair or replace the failed equipment, while the damage limit covers surrounding property.

Digital equipment and data loss may be covered for physical damage to electronic equipment, but loss of data itself requires a separate endorsement.

Underwriting factors: construction class (frame, joisted masonry, non-combustible, masonry non-combustible, fire-resistive, modified fire-resistive), occupancy, protection class, exposure, housekeeping, and age.

Protection class (public protection classification) rates fire department response and water supply on a scale of 1 to 10, with 1 being the best and 10 indicating no recognized protection.

COPE: Construction, Occupancy, Protection, and Exposure are the four core underwriting elements for fire risk.

Rating methods: class rating for homogeneous risks, schedule rating for individual risks with debits and credits, experience rating for loss history, and composite rating for large risks.

Loss costs and advisory rates are filed by rating bureaus; insurers apply loss cost multipliers and may file independent rates subject to regulatory approval.

Deductibles and coinsurance act as loss-prevention incentives by shifting a portion of the loss to the insured.

Loss prevention measures: sprinkler systems, automatic alarms, fire walls, housekeeping standards, hot-work permits, and security systems reduce frequency and severity.

Risk retention and transfer: retention through deductibles and self-insured retentions, transfer through insurance and contractual indemnity clauses.

Catastrophe exposure modeling assesses PML (probable maximum loss) and aggregate accumulation across locations and perils.