Insurance Principles and Concepts
This domain tests whether you can read a policy, apply valuation rules, and explain why a carrier owes what it owes. Expect questions on indemnity, insurable interest, policy structure, coinsurance, deductibles, and ACV versus replacement cost.
Indemnity, interest, and cause
Indemnity restores the insured to the same financial position, no better. Insurable interest in property must exist at the time of loss; a person with no financial stake cannot collect. Coverage follows proximate cause, the efficient and dominant cause of loss rather than the last event in the chain. If an excluded peril sets an included peril in motion, the exclusion generally controls.
Anatomy of the policy
Declarations identify the insured, property, limits, and deductible. The insuring agreement is the broad promise; exclusions narrow it; conditions impose post-loss duties such as notice, proof of loss, mitigation, cooperation, and appraisal. Endorsements amend the base form, and a public adjuster earns the fee by knowing which endorsement changes the answer.
Valuation and coinsurance
Actual cash value is replacement cost less depreciation. Replacement cost coverage pays new-for-old, commonly after repair or replacement is completed. Coinsurance is a promise to carry insurance to a stated percentage of value; a shortfall produces a proportional penalty, not a forfeiture.
Worked example
A building has a $1,000,000 replacement cost, an $600,000 limit, an 80% coinsurance clause, a $200,000 partial loss, and a $10,000 deductible. Insurance required is 80% x $1,000,000 = $800,000. The did-over-should ratio is $600,000 / $800,000 = 0.75. Payable is ($200,000 x 0.75) - $10,000 = $140,000. The insured absorbs $50,000 of coinsurance plus the deductible.
Traps
- Applying replacement cost when the form pays ACV until repairs are made.
- Using loss over limit instead of insurance carried over insurance required.
- Treating the deductible as a percentage of the loss rather than of the policy limit.
- Overlooking that ordinance-or-law coverage is separately limited.