Property Insurance Fundamentals
Valuation
Property claims settle at actual cash value (replacement cost minus depreciation) or replacement cost. Replacement cost generally requires repair or replacement; if the insured does not repair or replace, many forms revert to ACV. Functional replacement cost substitutes modern materials of like function for obsolete construction.
Coinsurance
Coinsurance requires the insured to carry a limit equal to a stated percentage of value at the time of loss. Underinsurance reduces the claim:
Payment = (limit carried ÷ limit required) × loss, never more than the limit carried.
Worked example: 80% coinsurance, building value $500,000, so the required limit is $400,000. The insured carries $300,000 and has a $100,000 loss. Payment = (300,000 ÷ 400,000) × 100,000 = $75,000. Carrying the required $400,000 would pay the full $100,000, subject to the limit.
Causes of loss and conditions
Basic form covers named perils such as fire, lightning, explosion, windstorm, hail, smoke, aircraft, vehicles, riot, and vandalism. Broad form adds perils such as burglary damage, falling objects, weight of ice and snow, and accidental water discharge. Special form is open perils: everything is covered unless excluded, which flips the burden of proof. Homeowners forms often use open perils on the building but named perils on contents.
Other tested concepts include mortgagee clauses, which protect the lender's interest and let the insurer pay the mortgagee even when the insured's claim is impaired; vacancy and unoccupancy conditions; other insurance provisions; appraisal; salvage; inflation guard; blanket versus specific limits; and reporting forms with deposit premiums and year-end adjustment.
Trap: coinsurance uses value at the time of loss, not the limit purchased, and the deductible is applied before the coinsurance calculation.