Property principles

Property insurance covers damage to or loss of the insured’s own property. It’s one half of the “P&C” track. All STABLE.

Insurable interest & indemnity in property

• You must have an insurable interest in the property — a financial stake — to insure it. For property, the interest must exist at the time of loss.
• Property insurance is a contract of indemnity: it restores you to your pre-loss financial position, no more. You can’t profit from a loss.

Valuation — how a loss is measured

Method	What you get paid
Actual Cash Value (ACV)	Replacement cost minus depreciation. (Old roof pays like an old roof.)
Replacement Cost (RC)	Cost to replace with new, no depreciation (often subject to actually repairing/replacing).
Agreed value	A value fixed in advance by insurer + insured (waives coinsurance).
Market value	What it would sell for (land + supply/demand) — usually not how buildings are insured.
Functional replacement	Replace with a functionally equivalent (often cheaper/modern) substitute.

Exam staple: ACV = Replacement Cost − Depreciation.

Coinsurance (and the penalty)

Property policies often include a coinsurance clause requiring the insured to carry coverage equal to a stated percentage (commonly 80%) of the property’s value. Underinsure, and at claim time you share the loss via the coinsurance penalty:

   Payment = (Insurance carried ÷ Insurance required) × Loss  − deductible
                                                         (capped at the limit)

Worked example: A building worth $500,000 with an 80% coinsurance clause must carry $400,000. The owner carries only $300,000 and has a $40,000 loss.

   Payment = ($300,000 ÷ $400,000) × $40,000 = 0.75 × $40,000 = $30,000

The owner eats the other $10,000 as the coinsurance penalty. The lesson: carry to the required percentage.

Causes-of-loss forms (named-peril vs open-peril)

• Named-peril coverage lists the perils it covers — if it’s not listed, it’s not covered. The insured must prove the loss was from a listed peril.
  • Basic form — a short list (fire, lightning, windstorm, etc.).
  • Broad form — a longer list (adds things like falling objects, weight of ice/snow, water damage from plumbing).
• Open-peril (“special”/“all-risk”) coverage covers all causes except those excluded — broader, and the insurer must prove an exclusion applies.

Direct vs indirect (consequential) loss

• Direct loss — the immediate physical damage (the fire burns the store).
• Indirect / consequential loss — the downstream financial loss (the store can’t operate → lost income). Covered by business income / business interruption and extra expense coverage.

Why this connects to underwriting

Valuation, coinsurance, and peril scope are all underwriting and rating levers — they shape how much risk the insurer takes and what it charges. The same machinery (measuring exposure, setting terms) reappears in 13 Underwriting fundamentals.

Next

→ 01 Property coverages

Drill this page →4 bank questions stand behind what you just read. Check it while it’s warm.