Insurance Principles and Policy Basics
Core principles
Insurance is a contract of indemnity: it restores the insured to the pre-loss financial position, not better. Insurable interest must exist at the time of loss. Policy construction reads the declarations, insuring agreement, conditions, exclusions, and definitions together; ambiguities are often construed against the drafter, but plain language controls. "Occurrence" usually means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.
Valuation and limits
Actual cash value (ACV) equals replacement cost minus depreciation; replacement cost value (RCV) pays to repair or replace with new materials of like kind and quality, subject to policy limits and duties. Coinsurance clauses require the insured to carry a limit at a specified percentage of value; otherwise a penalty applies to partial losses. Deductibles apply per occurrence unless the policy says otherwise. Mississippi's valued policy law makes the policy amount recoverable for a total loss of a building by fire when the policy was issued for that amount, subject to statutory conditions. Mortgagee clauses protect the lender's interest and require notice to the mortgagee.
Worked example
A building has an RCV of $400,000 and a 90% coinsurance clause, so the required limit is $360,000. The insured carries $270,000. A $90,000 partial loss occurs. The coinsurance penalty is ($270,000 ÷ $360,000) × $90,000 = $67,500, less the deductible. Carrying the required limit would pay $90,000 less deductible. This is why underinsurance matters even when the loss is below the limit.
Traps
- Applying a deductible to each item rather than each occurrence.
- Paying RCV before repair or replacement is completed.
- Ignoring policy conditions such as proof of loss and suit limitation.
- Confusing "additional insured" with "loss payee."