Insurance Principles and Concepts
Domain overview
This domain tests the doctrines that underpin every property and casualty claim: indemnity, insurable interest, good faith, causation, and the limits on recovery. A public adjuster must apply these principles when measuring a loss and explaining settlement math to an insured.
Core rules
- Indemnity restores the insured to approximately the pre-loss financial position; it does not create profit. Recovery is bounded by the loss, policy limit, deductible, and applicable valuation method.
- Insurable interest in property must exist at the time of loss. A purchaser cannot acquire an interest after the loss and then claim.
- Utmost good faith requires accurate application information and claim statements. A material misrepresentation may permit rescission or denial.
- Proximate cause is the efficient cause that sets the loss in motion without which it would not have occurred; intervening causes can break the chain.
- Subrogation lets the insurer pursue a responsible third party after paying; contribution allocates loss among concurrent policies.
- Actual cash value (ACV) is commonly replacement cost less depreciation; replacement cost value (RCV) pays to repair or replace with new property of like kind and quality, often after completion.
Worked example
A kitchen fire destroys a five-year-old refrigerator. Replacement cost is $2,000; depreciation is $600; the policy has a $500 deductible. Under ACV, the adjuster computes $2,000 − $600 = $1,400, then subtracts the deductible: $900 payable. Under RCV, the initial payment is $2,000 − $500 = $1,500, with $600 of recoverable depreciation released after proof of replacement. The insured cannot collect both ACV and full RCV and end up better off than before the loss.
Traps
Do not treat a policy limit as the measure of loss; do not ignore depreciation, deductible, or coinsurance. Do not assume “all risk” covers every cause. Do not confuse insurable interest with the named insured-mortgagees and loss payees may have separate rights.