Insurance Principles and Policy Coverage
Domain 1 - Insurance Principles and Policy Coverage tests whether you can read a homeowner or commercial property policy as an indemnity contract and apply its insuring agreement, exclusions, exceptions, conditions, and valuation rules to a Hawaii loss. Expect questions on insurable interest, actual cash value versus replacement cost, coinsurance, deductibles (including percentage hurricane deductibles), other insurance, duties after loss, and appraisal.
Build coverage from the policy, not from sympathy
Coverage is not a single clause. The insured must show an accidental direct physical loss by a covered peril; the insurer then bears the burden of an exclusion; the insured may restore coverage through an exception to an exclusion. Insurable interest must exist at the time of loss. Indemnity means putting the insured in the same financial position, not better; betterment and depreciation matter. ACV is replacement cost less depreciation; replacement cost usually requires repair or replacement and may be paid in two stages, with recoverable depreciation withheld until work is done. Extended replacement cost can pay above the limit; guaranteed replacement cost is rare and must be read literally.
Conditions that change the arithmetic
Coinsurance is a promise to carry insurance to a percentage of value. The formula is (limit carried ÷ limit required) × loss, then subtract the deductible. Percentage deductibles, especially hurricane deductibles in Hawaii, apply to a dwelling limit rather than a flat dollar amount. Other-insurance clauses allocate loss among policies; subrogation transfers recovery rights to the insurer after payment; appraisal resolves amount disputes, not coverage disputes.
Worked example
A building has a replacement cost of $1,200,000, an 80% coinsurance clause, a $720,000 limit, a $300,000 covered loss, and a $10,000 deductible. Required insurance is $960,000. The insured carried 75% of that ($720,000 ÷ $960,000). The coinsurance-adjusted loss is 0.75 × $300,000 = $225,000. After the deductible, the insurer pays $215,000. If the limit had been $960,000, the payment would have been $300,000 − $10,000 = $290,000.
Traps
Common errors: treating ACV as replacement cost; applying the deductible before coinsurance; overlooking ordinance-or-law coverage for code-required upgrades; assuming an “all risk” form covers every cause; missing a separate hurricane deductible; and confusing a policy limit with the amount payable. Another trap is ignoring policy conditions-late notice, failure to protect property, or no proof of loss can defeat an otherwise covered claim, although Hawaii law examines prejudice.