Property Insurance Basics, Policy Provisions, and Loss Valuation
Named perils vs. open perils
A named peril (or specified peril) form covers only what is listed. An open peril ("special") form covers everything except what is excluded. The burden of proof flips: under a named peril form the insured must show the loss was a listed cause; under an open peril form the insurer must show an exclusion applies.
Valuation methods
- Actual cash value (ACV) = replacement cost minus depreciation.
- Replacement cost (RC) = cost to repair or replace with new property of like kind and quality, no depreciation.
- Functional replacement cost substitutes modern materials (e.g., drywall for plaster).
- Agreed value suspends the coinsurance requirement when the limit is accepted at inception.
Policy provisions you must recognize
Duties after loss (notice, protect property, proof of loss, cooperate); mortgagee/loss payable clauses (the mortgagee's interest survives the insured's acts); other insurance pro rata sharing; appraisal for disputes over amount of loss; salvage; abandonment not permitted; vacancy restrictions; ordinance or law exclusions; pair or set and inflation guard provisions.
Coinsurance worked example
80% coinsurance, building RC = $500,000. Required limit = $400,000. The insured carries $300,000 and suffers a $100,000 covered loss with a $1,000 deductible.
Payment = ($300,000 ÷ $400,000) × $100,000 = $75,000, minus the $1,000 deductible = $74,000. The insured absorbs $25,000 as a coinsurance penalty plus the deductible.
Trap: if the limit carried exceeds the required amount, the insured collects the full loss (up to the policy limit) - coinsurance never pays more than the loss.