Insurance principles and policy basics
This domain tests the doctrines underneath every coverage decision: why a policy pays, how much it pays, and what the insured must do to collect. Expect property scenarios rather than isolated definitions.
Core doctrines
Indemnity means restoring the insured to approximately the pre-loss financial position - never better. Insurable interest must exist at the time of loss. Insurance is a contract of adhesion drafted by the insurer, so ambiguity that survives a plain-language, whole-policy reading is construed against the insurer. It is aleatory (uneven exchange) and conditional (duties after loss). Utmost good faith runs both ways and underpins the fraud and misrepresentation provisions.
Policy anatomy
Declarations (insured, property, limits, deductible), insuring agreement (perils covered), exclusions, conditions (proof of loss, cooperation, appraisal, suit limitation), definitions, and endorsements that amend the base form. Endorsements control over conflicting form language.
Valuation
Actual cash value equals replacement cost minus depreciation; replacement cost pays new-for-old subject to repair-or-replace conditions. Functional and economic obsolescence can push ACV below a simple age-based figure. Deductibles apply per occurrence, and coinsurance is applied to the loss before the deductible.
Worked example
Commercial building, limit $600,000, replacement value $1,000,000, 80% coinsurance, $200,000 covered loss, $5,000 deductible. Required limit = $800,000. Recovery = (600,000 ÷ 800,000) × 200,000 = $150,000, less $5,000 = $145,000. Subtracting the deductible first, or comparing the limit to the loss rather than to the value, produces the wrong answer - the classic exam trap.
Traps
Treating replacement cost as automatically payable before repairs; assuming replacement cost includes code upgrades (ordinance-or-law coverage is separate); confusing insurable interest with title; ignoring other-insurance and pro rata clauses.