Insurance Principles and Policy Coverage
What this domain tests
This domain tests the principles behind property insurance and the policy provisions a public adjuster must read before negotiating. Expect questions on insurable interest, indemnity, policy structure, homeowners coverages, exclusions, deductibles, replacement cost, additional living expense, and coinsurance.
Core rules
- Insurance is a contract of indemnity. The insured must have an insurable interest at the time of loss. The goal is to restore the insured to the pre-loss financial position, not to create a profit.
- A homeowners HO-3 typically provides open-peril coverage on the dwelling and named-peril coverage on personal property. Named perils commonly include fire, lightning, windstorm, hail, explosion, riot, theft, and vandalism.
- Standard exclusions include flood, earth movement, nuclear hazard, intentional loss, neglect, ordinance or law, and limited mold coverage. Exclusions are read narrowly, but a genuine ambiguity is construed against the insurer as drafter.
- Coverage A is the dwelling; Coverage B is other structures; Coverage C is personal property; Coverage D is loss of use. Additional living expense pays the necessary increase in living expenses, not the insured's entire rent or mortgage.
- Actual cash value is replacement cost less depreciation. Replacement cost coverage pays actual cash value first and holds recoverable depreciation until the insured repairs or replaces the damaged property.
- Commercial property policies often contain a coinsurance clause. The formula is insurance carried divided by insurance required, multiplied by the loss, then reduced by the deductible, and capped at the policy limit.
Worked example
A building has a replacement cost of $1,000,000 and an 80 percent coinsurance requirement, so $800,000 is required. The insured carries $600,000 and suffers a $200,000 covered loss with a $5,000 deductible. The coinsurance calculation is $600,000 divided by $800,000, or 0.75, times $200,000, which equals $150,000. After the $5,000 deductible, the payment is $145,000, subject to the policy limit. If the insured had carried $800,000, the loss would be paid in full after the deductible.
Traps
Do not apply commercial coinsurance to a homeowners policy that has no coinsurance clause. Do not confuse actual cash value with replacement cost. Do not pay additional living expense as though it were lost rent, and do not ignore ordinance-or-law, matching, or code-upgrade issues when they affect the repair scope.