Property and Casualty Insurance Basics
Domain overview
Property and casualty insurance basics test how policies are built and how coverage is triggered. Expect policy structure, perils and hazards, limits, deductibles, coinsurance, and the difference between first-party property and third-party liability.
Core rules
- Property insurance pays the insured for damage to owned property; casualty insurance covers legal liability to others, plus related lines.
- A peril is a cause of loss (fire, windstorm, theft). A hazard increases the chance or severity of loss (poor wiring, icy steps). A risk is the chance of loss.
- Policies use declarations, insuring agreement, conditions, exclusions, and definitions. Exclusions narrow coverage; conditions impose duties after loss.
- Coinsurance in commercial property requires the insured to carry a stated percentage of value. A penalty applies when the limit is below that percentage.
- Deductibles shift a small loss to the insured; limits cap recovery. Occurrence policies respond to injury or damage during the policy period; claims-made liability policies respond when a claim is made, subject to retroactive dates.
- Causes of loss forms range from named-peril to special (“all risk”) forms, which cover all risks except those excluded.
Worked example
A building has an 80% coinsurance clause and a value of $1,000,000. The insured carries $600,000. A covered $100,000 loss occurs, with a $5,000 deductible. The required limit is 80% × $1,000,000 = $800,000. The coinsurance ratio is $600,000 ÷ $800,000 = 0.75. The loss payment before deductible is 0.75 × $100,000 = $75,000. After the $5,000 deductible, the insurer pays $70,000. Carrying the full $800,000 would have avoided the penalty.
Traps
Coinsurance is not the same as a deductible, and it generally does not apply to liability coverage. Do not apply a coinsurance penalty to a total loss without checking the policy and state rules. Do not confuse “special form” with “covers everything”; exclusions still apply. Read definitions and endorsements before quoting a limit.