Property and Casualty Insurance Basics
Domain 2: Property and Casualty Insurance Basics
This domain tests how policies are built and how the major property and liability lines respond. Expect questions on policy structure, coverage grants, exclusions, limits, deductibles, coinsurance, and the difference between first-party property and third-party liability coverage.
Policy architecture
Every policy has declarations (insured, locations, limits, deductible, forms), an insuring agreement (the promise), conditions (duties after loss, valuation, appraisal), exclusions, and definitions. Endorsements amend the policy and control over conflicting printed text. Named-peril policies cover only listed causes; special-form (all-risk) policies cover all risks except those excluded. The burden is generally on the insured to show a covered loss; the insurer then bears the burden of proving an exclusion, and the insured may invoke an exception.
Property lines
Homeowners forms differ by breadth: HO-3 covers the dwelling on a special form and personal property on a named-peril basis; HO-5 covers both on a special form. Dwelling policies (DP-1, DP-3) insure non-owner-occupied dwellings. Coverage A is the dwelling, B other structures, C personal property, D loss of use. Commercial property policies often add coinsurance, which requires the insured to carry a stated percentage of the full replacement value.
Liability lines
Commercial general liability (CGL) covers bodily injury and property damage under Coverage A, personal and advertising injury under B, and medical payments under C. Occurrence policies respond when injury or damage happens; claims-made policies respond when the claim is first made, subject to retroactive dates. Personal auto liability and uninsured/underinsured motorist coverage are third-party and first-party coverages respectively.
Worked example
A building has an RCV of $1,000,000, an 80% coinsurance clause, a $600,000 limit, and a $5,000 deductible. The required limit is 0.80 × $1,000,000 = $800,000. A covered $200,000 loss yields (600,000 / 800,000) × 200,000 = $150,000, less the $5,000 deductible = $145,000. The insured is penalized for underinsurance; the coinsurance percentage applies to the value at risk, not to the premium.
Traps
- Applying coinsurance to the loss instead of testing the limit against required insurance.
- Mixing up occurrence and claims-made triggers.
- Treating an exclusion as an affirmative grant of coverage.
- Forgetting that an endorsement overrides the base form.
- Assuming a liability policy pays the claimant directly before a settlement or judgment.