Property Insurance
Coverage and valuation
Property insurance protects real property, contents and related exposures against named perils or all risks. Named-peril forms list what is covered; all-risk forms cover accidental loss except exclusions, so the exclusion list does the real work. Indemnity is the governing principle. Actual cash value deducts depreciation; replacement cost pays to repair or replace with new property of like kind and quality, subject to policy limits and conditions. Insurable interest, occupancy, protective safeguards and material change in risk all affect recovery.
Conditions that change the payout
- A coinsurance clause requires the insured to carry a specified percentage of the property's value. If the limit is too low, the loss payment is reduced proportionately, even if the loss is smaller than the limit.
- A deductible applies per occurrence unless the policy says otherwise.
- A mortgage clause protects the lender's interest and usually lets the lender receive loss payments and notice of cancellation.
- Subrogation and waiver-of-subrogation clauses affect recovery from negligent third parties.
- Vacancy, unoccupancy, faulty workmanship and by-law exclusions are common sources of denied claims.
Worked example
A building has a replacement value of $1,000,000. The policy has an 80% coinsurance clause, so the required limit is $800,000. The insured carries only $600,000. A covered $200,000 loss occurs, and the deductible is $5,000. The coinsurance calculation is $200,000 × ($600,000 ÷ $800,000) = $150,000. After the deductible, the insurer pays $145,000. If the limit had been at least $800,000, the loss would be paid up to the limit, less the deductible.
Traps
Coinsurance is not a deductible. All risks does not mean all losses are covered. Replacement cost does not eliminate the policy limit. A mortgage clause does not make the lender the owner. A building that is vacant longer than the policy allows may lose coverage even if the loss is otherwise covered.