Insurance Principles and Policy Provisions
What this domain tests
This domain tests whether you can read a policy as a contract: find coverage, apply limits and valuation rules, and explain why a dollar amount is payable.
Core rules
- Indemnity is the ceiling. The insured is restored to the pre-loss position, never better. Limits, deductibles, coinsurance, and depreciation all reduce what is paid.
- Insurable interest must exist at the time of loss; a buyer under a signed contract may have it, a stranger does not.
- Policy anatomy: declarations, insuring agreement, conditions, exclusions, endorsements. When an endorsement conflicts with the base form, the endorsement controls.
- Named-peril versus open-peril ("all risk"): the insured proves the loss falls within the insuring agreement; the insurer then bears the burden of an exclusion, and the insured may rebut with an exception to that exclusion.
- Valuation: actual cash value = replacement cost value minus depreciation. Replacement cost pays new without depreciation but usually requires repair or replacement first. Coinsurance penalizes underinsurance on commercial property.
Worked example
A building has a $600,000 limit, an 80% coinsurance clause, a replacement cost of $1,000,000, a covered loss of $200,000, and a $5,000 deductible. Required limit is 80% x $1,000,000 = $800,000. Payment = (600,000 / 800,000) x 200,000 = $150,000, less $5,000 = $145,000. Carrying $800,000 would have paid the loss in full, less deductible. The penalty is computed on the limit required to insure to value, not on the limit purchased.
Traps that cost marks
- Calling market value "actual cash value"; market value includes land and sale conditions.
- Skipping endorsements that add water backup, mold, or matching coverage.
- Forgetting ordinance-or-law, debris removal, and additional living expense sublimits when building the number.
- Treating a denial as final when an exception to the exclusion restores coverage.