Insurance Principles and Concepts
The doctrines examiners return to
- Indemnity. The insured should be restored, not enriched. Every valuation and limit question is really an indemnity question.
- Insurable interest. In property it must exist at the time of loss; a buyer who closes after the fire has no claim for the destroyed building.
- Utmost good faith. Misrepresentation (intentional, material falsehood), concealment (silence about a material fact), and warranty (a promise whose breach may void coverage) are graded separately on the exam.
- Subrogation. After paying, the insurer steps into the insured's shoes against the tortfeasor, but never recovers more than it paid, and never prejudices the insured's uninsured remainder.
- Other insurance. Pro rata (proportional by limits), excess (pays after primary exhausts), and non-contributory clauses resolve stacking disputes.
Valuation vocabulary
Actual cash value equals replacement cost less depreciation; replacement cost pays new-for-old after repair; agreed value removes the valuation dispute entirely. Functional and economic obsolescence reduce value even where physical depreciation is minimal.
Worked example
A 10-year-old shingle roof with a 20-year expected life has a $40,000 replacement cost and a $1,000 deductible. Straight-line depreciation is 50%, so ACV is $20,000; the initial payment is $19,000. The insurer holds back $20,000 as recoverable depreciation, released on proof of completed replacement, and the deductible is applied only once.
Traps that cost marks
Applying coinsurance to a valued policy; paying replacement cost before repairs are done; saying subrogation lets the insurer recover the deductible (it belongs to the insured unless the policy says otherwise); confusing waiver (voluntary surrender of a right) with estoppel (detrimental reliance).