Property Insurance Basics
Two questions settle most property claims
Which perils? Named-peril forms list what is covered; open-peril ("special") forms cover risk of direct physical loss unless excluded. How much? Valuation drives the number: actual cash value (replacement cost minus depreciation), replacement cost, functional replacement cost, agreed value, or market value. A deductible is then applied to the adjusted loss.
Coinsurance
Commercial property forms commonly require insurance equal to a stated percentage of value at the time of loss (usually 80%). Recovery = (limit carried ÷ required limit) × loss, capped at the policy limit, less the deductible.
Structures of coverage
Specific (scheduled) limits vs. blanket limits covering several items in one amount. Direct loss is damage to property; indirect/consequential loss is business income, extra expense, or rents. Deductibles may be flat or a percentage of the limit. A pair and set clause reduces payment when a matched item is only partly damaged. Property policies are written on an occurrence basis, so the loss date controls which policy responds.
Traps
- Applying a coinsurance formula when the form has no coinsurance clause; without one, a partial loss is paid up to the limit.
- Forgetting that the deductible comes off the adjusted loss, not off the limit.
- Calling a broad named-peril form "special"; special means open peril.
- Assuming business income pays to rebuild the building; it replaces lost earnings and continuing expenses.
Worked example
80% coinsurance, replacement cost $1,000,000, so $800,000 is required. The insured carries $600,000 and a $100,000 loss occurs. Payment = ($600,000 ÷ $800,000) × $100,000 = $75,000, less the deductible. Underinsurance makes the insured a coinsurer for the shortfall.