Insurance Principles and Policy Fundamentals
Start with the policy architecture
Every claim question traces back to the policy's structure: declarations (who, what, when, limits, deductibles), insuring agreement (the promise and perils covered), conditions (duties of insured and insurer), exclusions, and endorsements (which amend the form). Definitions control, so read the defined term before applying a clause.
Core principles
Indemnity restores the insured to the pre-loss financial position, no better. Insurable interest must exist at the time of loss. Utmost good faith underpins the application and claims duties. Subrogation lets the insurer step into the insured's shoes after paying. Fortuity means the loss must be accidental from the insured's standpoint. Valuation matters: actual cash value (ACV) is typically replacement cost less depreciation, while replacement cost (RC) pays new without depreciation, often withheld until repair or replacement is complete.
Traps
- Applying a deductible per item rather than per occurrence.
- Treating "all risks" as "all losses" - exclusions still apply.
- Ignoring endorsements that change limits or add coverage.
- Confusing occurrence-based policies with claims-made reporting triggers.
- Assuming a policy pays for betterment or code upgrades absent ordinance-or-law coverage.
Rule of thumb
Read in order: declarations, insuring agreement, exclusions, exceptions, conditions, endorsements. If any step fails, stop and document.
Worked example: A $12,000 RC roof loss on a 10-year-old 20-year shingle roof with a $1,000 deductible. Depreciation is 50% × $12,000 = $6,000, so ACV is $6,000 and the net ACV payment is $5,000. The withheld $6,000 is payable only when replacement is completed, subject to the policy.