Property Insurance Basics
Policy architecture
The homeowners program is a package: Coverage A (dwelling), B (other structures), C (personal property), D (loss of use), E (personal liability), F (medical payments to others). Know the form differences: HO-2 broad named perils, HO-3 open perils on the dwelling but named perils on contents, HO-5 open perils on both, HO-8 modified coverage for older homes. A DP-1/DP-2/DP-3 covers a dwelling only - no liability.
Commercial property adds coinsurance, blanket vs specific limits, reporting forms, business income, and the BOP for eligible small businesses.
Valuation and limits
Actual cash value = replacement cost minus depreciation. Replacement cost pays new-for-old. Functional replacement cost and extended replacement cost (a percentage above the limit) are common endorsements.
The coinsurance rule of thumb
When a coinsurance clause (usually 80%) applies, recovery is reduced in proportion to underinsurance. Formula: (limit carried ÷ limit required) × loss = recovery, capped at the policy limit.
Worked example: building worth $500,000, 80% coinsurance, $300,000 carried, $100,000 loss. Required limit = $400,000. Recovery = ($300,000 ÷ $400,000) × $100,000 = $75,000. Because the limit carried exceeded the loss, only the proportional penalty applies.
Traps
- Coinsurance applies to the loss amount, not to the deductible; subtract the deductible first, then apply the formula.
- Standard property exclusions: earth movement, flood, ordinance or law, neglect, intentional loss, wear and tear. Separate flood or difference-in-conditions coverage is needed.
- The mortgagee clause protects the lender's interest even if the insured's own conduct voids coverage.
- Appraisal resolves valuation disputes; arbitration resolves coverage disputes.