Insurance Principles and Policy Provisions
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 runs both ways, so a material misrepresentation can void coverage. Insurance is a contract of adhesion, construed against the drafter, and aleatory. Subrogation lets the insurer step into the insured's shoes; contribution and 'other insurance' clauses allocate a loss among carriers.
Reading a policy in order
Declarations, insuring agreement, exclusions, exceptions to exclusions, then conditions. Conditions - proof of loss, duties after loss, suit limitation - can defeat an otherwise covered claim. Commercial property coinsurance penalizes underinsurance: (limit carried divided by limit required) times the loss, never exceeding the limit.
Valuation
Actual cash value is replacement cost minus depreciation. Replacement cost pays new-for-old, often with recoverable depreciation held back until repair or replacement is complete. Homeowners forms progress from HO-2 (broad named perils) to HO-3 (special, open perils on the dwelling) to HO-5 (comprehensive). Perils are named or open; when a covered and an excluded peril combine, the efficient proximate cause analysis usually controls.
Traps
- Assuming replacement cost means immediate full payment.
- Confusing 'loss of use' (the coverage) with additional living expense (the measure or sub-limit).
- Forgetting that earthquake and flood are excluded in standard forms and require separate or NFIP coverage.
- Treating a deductible as reducing the loss rather than the payment.
Rule of thumb
Before valuing anything, state the insuring agreement in one sentence and test every exclusion against the facts. Only if coverage survives do you move to arithmetic.