Property Insurance Policy Basics and Provisions
How a property policy is built
Every policy has declarations (who, what, where, how much, deductibles), an insuring agreement (the promise and the perils), conditions (the rules of the relationship), exclusions, and definitions - and defined words control.
Perils. Named-peril forms list what is covered. Open-peril (special) forms cover risks of direct physical loss except what is excluded. Traps: 'special' does not mean everything - flood, earth movement, wear and tear, deterioration, and neglect are normally out - and an ensuing loss (a covered peril flowing from an excluded one, such as fire from defective wiring) may still be covered.
Valuation. Actual cash value = replacement cost minus depreciation. Replacement cost pays new-for-old, usually capped at the limit and conditioned on repair or replacement. Also know functional replacement cost and agreed value.
Coinsurance / insurance-to-value. Payment = (insurance carried ÷ insurance required) × loss, then subtract the deductible, where insurance required = the coinsurance percentage (commonly 80%) × value at the time of loss. The penalty is applied before the deductible, and the payment never exceeds the limit. Underinsurance is the single most tested concept here.
Mortgagee clause. The lender is paid to the extent of its interest, is notified of cancellation or nonrenewal, and may pay premium; its rights survive the insured's acts. Contrast a loss payee or additional insured.
Duties after loss: prompt notice, protect property from further damage, proof of loss, inventory, cooperate, submit to examination. Appraisal resolves amount-of-loss disputes; subrogation transfers recovery rights; salvage belongs to the insurer; abandonment is not permitted.
Worked example: value $400,000, 80% coinsurance = $320,000 required, $240,000 carried, $80,000 loss, $1,000 deductible. (240,000 ÷ 320,000) × 80,000 = $60,000; minus deductible = $59,000. Applying the deductible first would give the wrong answer.