Property and Casualty Insurance Basics
Domain focus
Property and Casualty Insurance Basics tests coverage structures and calculations appearing in personal and commercial policies: property limits and valuation, coinsurance, deductibles, liability triggers, and common endorsements.
Core rules
- Property policies insure covered causes of loss against a limit; most use actual cash value or replacement cost. Coinsurance is a property condition requiring the insured to carry a limit near the value of the property; a penalty applies at loss if the limit is too low.
- The coinsurance formula is (limit carried divided by limit required) multiplied by the loss, minus the deductible, subject to the policy limit. The required limit is the coinsurance percentage multiplied by the property value at the time of loss.
- Liability policies respond to claims for bodily injury or property damage. An occurrence policy covers injury that happens during the policy period; a claims-made policy covers claims first made during the period, and the retroactive date controls prior acts.
- A mortgagee clause protects the lender's interest; an additional insured endorsement protects another party. They are not interchangeable.
- Personal auto requires liability limits and offers UM/UIM; commercial auto, workers compensation, and umbrella/excess policies fill other exposures.
Worked example
A building has a replacement value of $1,000,000. The policy has an 80% coinsurance clause, a $600,000 limit, and a $1,000 deductible. Required limit equals $800,000. The coinsurance ratio is $600,000 divided by $800,000, or 0.75. A $100,000 covered loss pays (0.75 times $100,000) minus $1,000, or $74,000, because the insured carried less than the required amount.
Traps
Applying coinsurance to a valued policy or to a liability policy; using the policy limit as the required limit; confusing an occurrence trigger with a claims-made trigger; assuming a certificate of insurance gives the holder additional-insured status; and overlooking that a mortgagee clause and an additional insured endorsement serve different purposes.