Property Insurance Basics
The policy skeleton
Property forms are built from declarations, an insuring agreement, covered property, causes of loss, exclusions, conditions, and endorsements. Named-peril forms list what is covered. Special (open) forms cover risks of direct physical loss unless excluded - which shifts the burden: the insured shows a loss, and the insurer must prove an exclusion applies.
Valuation and limits
- ACV = replacement cost less depreciation; RC pays new, often with a holdback.
- Coinsurance is a promise to insure to a percentage of value (commonly 80%, 90%, or 100%). Falling short reduces the payment in proportion to the shortfall.
- Deductibles may be flat or percentage-based - a 2% wind/hail deductible on a $500,000 building is $10,000.
- Additional coverages (debris removal, preservation of property, fire department service charges) carry their own small limits.
Exclusions to read every time
Ordinance or law, earth movement, flood, water below the surface, vacancy, faulty workmanship, and intentional loss. Most can be partly bought back by endorsement.
Worked example
Building value $1,000,000; 90% coinsurance; limit purchased $600,000; covered loss $300,000; $5,000 deductible. The required limit is $900,000. Payment = ($600,000 ÷ $900,000) × $300,000 = $200,000, less the $5,000 deductible = $195,000. Without coinsurance the insured would have collected $295,000; the $100,000 gap is the coinsurance penalty.
Traps
Subtracting the deductible before applying the ratio (apply the ratio first, then deduct); testing coinsurance against market value instead of replacement cost; forgetting that flood and earth movement are excluded in nearly every property form no matter how the water arrived; overlooking that a total loss is generally paid at the limit regardless of coinsurance.