Property Insurance
This domain tests coverage for damage to buildings, contents, and related losses. Expect questions on named and broad perils, coverage parts, exclusions, replacement cost versus actual cash value, coinsurance, deductibles, loss of use, mortgagee clauses, vacancy, and sublimits.
Core rules
- Property policies insure described property against covered perils. Named-peril forms list covered causes; broad or special forms cover risks unless excluded.
- Common exclusions include flood, earthquake, wear and tear, gradual deterioration, vermin, faulty workmanship, and intentional loss. Buy-backs may be available.
- Replacement cost pays to repair or replace without depreciation, subject to conditions such as actually repairing and limits. Actual cash value deducts depreciation.
- Coinsurance requires the insured to carry a minimum percentage of value, commonly 80 percent. A penalty applies if the limit is too low at the time of loss.
- Deductibles apply per occurrence. Loss-of-use coverage pays additional living expenses or rental income for a stated period.
- A mortgagee clause protects the lender's interest. Vacancy and unoccupancy conditions can reduce or suspend coverage.
Worked example
A building is valued at 500,000. The policy has an 80 percent coinsurance clause, a 300,000 limit, a 100,000 loss, and a 2,000 deductible. Required insurance is 400,000. The coinsurance payment is 300,000 divided by 400,000, times 100,000, or 75,000. Subtract the 2,000 deductible for 73,000. The reasoning is that the insured carried only three-quarters of the required amount, so the loss is shared proportionately before the deductible.
Traps that cost marks
- Treating the coinsurance penalty as the deductible.
- Forgetting depreciation under actual cash value.
- Assuming flood or earthquake is covered by a standard property form.
- Ignoring sublimits and vacancy conditions.