Insurance Principles and Policy Contract Provisions
Core principles
Property insurance rests on indemnity (restore the insured to pre-loss condition, no profit), insurable interest (must exist at time of loss), utmost good faith, and the contract characteristics of adhesion (insurer drafts, ambiguities construed against the drafter) and aleatory (unequal exchange). These principles explain why betterment is deducted, why a buyer with no interest cannot recover, and why exclusions are read narrowly.
Reading the policy in order
Read declarations (limits, deductibles, forms), then the insuring agreement, then exclusions, then conditions (duties after loss, appraisal, suit limitation, mortgage clause, other insurance, subrogation). Texas homeowners forms include HO-A, HO-B, and HO-C, plus endorsements - most importantly the mold endorsement, which caps remediation at a limited amount (commonly $5,000) unless higher limits are purchased. Standard exclusions to know cold: flood and surface water (NFIP territory), earth movement, wear and tear, deterioration, mechanical breakdown, faulty workmanship, and marring/scratching.
Valuation mechanics
Actual cash value = replacement cost minus depreciation. Replacement cost coverage often pays ACV first and holds back recoverable depreciation until repairs are complete. Coinsurance applies mostly to commercial property: a limit below the required percentage produces a proportional penalty.
Traps
- Confusing wind-driven rain (often covered if the roof is damaged first) with flood (never covered on a standard policy).
- Missing the separate percentage hurricane/windstorm deductible on Texas coastal policies.
- Ignoring the two-year-and-one-day suit limitation typical of Texas property policies.
Worked example
Replacement cost $1,000,000; 80% coinsurance = $800,000 required. Limit carried $600,000. A $100,000 loss pays (600,000 ÷ 800,000) × 100,000 = $75,000, less the deductible. Carrying the full $800,000 would have paid the loss in full.