Property Insurance Basics and Policy Provisions
Reading a property policy
Policies are built in five parts: declarations (who, what, how much, when), insuring agreement (the promise), conditions (duties after loss), exclusions, and definitions, which control. Most disputes are decided by definitions and exclusions, not by the insuring agreement.
Actual cash value is replacement cost minus depreciation; replacement cost pays new for old without a depreciation deduction, typically after repair or replacement. Coinsurance is a promise to carry a limit at least equal to a stated percentage of value; if the insured is underinsured, the claim is reduced proportionally. Formula: (limit carried ÷ limit required) × loss, capped at the limit, then subtract the deductible.
Other provisions to know: pair and set (loss to one item of a set is valued at the difference between the set's value and its value after the loss); salvage; appraisal (a valuation remedy, not a coverage decision); other insurance (pro rata by limits); the mortgagee clause, which protects the lender even when the insured's own conduct voids coverage; debris removal; preservation of property; and the increase-in-hazard, vacancy, and concealment/fraud conditions.
Traps: applying coinsurance to a limit that already satisfies the requirement (no penalty); deducting depreciation and applying coinsurance in the wrong order; forgetting sublimits such as $500 for trees or $1,500 for jewelry theft.
Worked example: 80% coinsurance, replacement value $500,000, required limit $400,000, carried limit $300,000, loss $100,000. Payment = (300,000 ÷ 400,000) × $100,000 = $75,000, less the deductible. Had the insured carried $400,000, the full $100,000 would be paid.