Property and Casualty Insurance Fundamentals
Property and Casualty Insurance Fundamentals tests the core of property, liability, motor and marine cover: what is insured, what limits apply, how deductibles and average clauses work, and how reinsurance and salvage affect the net claim. The exam expects you to calculate indemnity, not just define it.
Core rules
- Property policies insure physical assets against named or all risks; liability policies respond to legal liability to third parties, subject to a limit of indemnity.
- Indemnity value is reinstatement cost less depreciation; reinstatement value replaces new for old, often subject to conditions.
- Average clause reduces recovery when the sum insured is less than the value at risk.
- Deductible/excess is the first loss the insured bears; franchise means no payment at all below the threshold.
- Salvage is the residual value of damaged property; the insurer is entitled to it after paying a total loss.
- Reinsurance transfers part of the risk to another insurer; it does not change the original policyholder's contract.
Worked example
A building worth 10,000,000 is insured for 6,000,000. A fire causes 2,000,000 damage; the policy has a 50,000 excess. Average clause: 6,000,000 / 10,000,000 x 2,000,000 = 1,200,000. Deduct 50,000 = 1,150,000 payable. If the damaged property has salvage worth 100,000, the insurer may take salvage or credit it against the loss. Reasoning: indemnity is capped by the proportion of insurance purchased, then the excess is applied; salvage prevents the insured from recovering twice.
Traps
- Applying average clause only to total losses; it applies to partial losses too.
- Confusing excess with franchise.
- Treating a liability limit as the sum insured for property damage.
- Ignoring salvage after a total loss.
- Assuming reinsurance gives the policyholder a direct claim against the reinsurer.