Coverage partFoundations
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Drill17 items
Property insurance basics on the P&C exam
Property insurance basics is where valuation and arithmetic enter the P&C exam: actual cash value (ACV) against replacement cost (RC), the coinsurance penalty, deductibles, how two policies split one loss, and the line between named and open perils, where the burden of proof changes sides.
Four questions behind every property claim
Any property loss raises the same four questions, in this order. Was the cause covered? That depends on the peril and on how the form defines its perils. What was the property worth? That is valuation. Did the insured carry enough? That is coinsurance, or the replacement cost condition on homeowners insurance. What comes off the top? The deductible, then any other insurance. Valuation has its own page, actual cash value vs replacement cost, with depreciation worked out.
Named or open perils
A named perils form lists what it covers, and the insured has to show a listed peril caused the loss. An open perils form (ISO's special form) covers direct physical loss unless an exclusion applies, and the insurer has to prove the exclusion. Common exclusions include wear and tear, war, nuclear hazard, flood and earth movement. The named vs open perils page drills the burden-of-proof point.
Proximate cause
Courts trace a loss back to its proximate cause, the first event in an unbroken chain that produced the damage. If wind tears a hole in a roof and rain pours through it all night, the wind is the proximate cause of the water damage, and coverage turns on whether windstorm is covered. The peril and hazard vocabulary underneath comes from principles of insurance.
Direct and indirect loss
A direct loss is the physical damage itself. An indirect loss follows from it: a landlord's lost rent, or the extra cost of working from a temporary site. Most property forms cover direct loss and leave indirect loss to separate coverages, such as loss of use on a homeowners policy or business income on commercial property.
Six ways to value a loss
| Method | How the amount is set | Our example |
|---|---|---|
| Actual cash value (ACV) | Replacement cost minus depreciation; some courts use the broad evidence rule | A 12-year-old water heater with a 15-year life: $1,600 new, minus 80% depreciation = $320 |
| Replacement cost (RC) | New property of like kind and quality, no deduction for depreciation | The same water heater, replaced new: $1,600 |
| Functional replacement cost | Repair with cheaper materials that do the same job | Plaster walls in an older house redone in drywall |
| Market value | What a willing buyer pays a willing seller | Rarely the measure for a building, since it includes the land |
| Agreed value (valued policy) | Insurer and insured fix the value in advance; no depreciation at claim time | A vintage motorcycle agreed at $28,000 |
| Stated amount | A stated limit, but the insurer pays the least of that amount, ACV or the repair cost | A show car stated at $9,000 and worth $7,500 at the loss: at most $7,500 |
Carrying 75% of the requirement: a $12,000 penalty
WorksheetCoinsurance
Warehouse worth $320,000 at the time of loss, 80% clause, insured for $192,000, $48,000 loss, $500 deductible
- Value at time of loss
- $320,000
- Coinsurance clause
- 80%
- Limit carried
- $192,000
- Covered loss
- $48,000
- Deductible
- $500
- Insurance required80% × $320,000$256,000
- Did carry ÷ should carry$192,000 ÷ $256,0000.75
- Share of the loss0.75 × $48,000$36,000
- Less the deductible$36,000 − $500$35,500
Insurer pays$35,500
This follows the ISO commercial property form (CP 00 10, 2012 edition), which takes the deductible off after the penalty; insurers and states can modify forms. The coinsurance formula page varies the inputs.
When two policies cover one loss
| Clause | How it splits | Policy A ($100,000 limit) | Policy B ($300,000 limit) |
|---|---|---|---|
| Pro rata | In proportion to the limits: A carries 1/4, B 3/4 | $20,000 | $60,000 |
| Contribution by equal shares | Equal amounts until the smaller limit runs out | $40,000 | $40,000 |
| Primary and excess (A primary) | A pays first up to its limit; B pays what is left | $80,000 | $0 |
Pricing a property loss
0 of 17 answered · 0 right
The coinsurance formula page runs more worksheets like the one above, with the value always taken at the time of loss.
Notes on each optionCommit to an answer first. The notes under the item then open on every option: what rules it in or out, and the one word that splits the runner-up from the key.
- Item 01
Under the ISO builders risk coverage form (CP 00 20), the limit of insurance should equal:
- ABid minus profit understates the finished building, since builders risk is written to full completed value.
- BCorrect: builders risk is written to the building's full completed value, in effect 100% insurance to value.
- CValue at the start of construction leaves the finished building badly underinsured as work progresses.
- D80% is a coinsurance habit from other forms; builders risk expects 100% of completed value.
- Item 02
A commercial property form states: 'We will pay for direct physical loss of or damage to Covered Property caused by or resulting from any Covered Cause of Loss.' This sentence is part of the:
- AThe declarations hold names, limits and premium, not the promise to pay.
- BDefinitions explain quoted terms without making the promise to pay.
- CConditions set the parties' duties, such as notice and proof of loss.
- DCorrect: 'We will pay for direct physical loss…' is the insurer's basic promise, which is the insuring agreement.
- Item 03
A matched pair of earrings is worth $1,000 as a set. A thief steals one earring, and the remaining earring alone is worth $200. Under a pair-and-set clause, the insurer pays:
- A$500 treats each earring as half the set, but a pair is worth more together.
- B$200 is what the insured still owns, not what the insurer pays.
- CCorrect: the pair-and-set clause pays the drop in value of the set, $1,000 − $200 = $800.
- D$1,000 pays for the whole set even though the insured keeps the remaining earring.
- Item 04
The event that sets in motion an unbroken chain of events leading to a loss is known as the:
- AA physical hazard only increases the chance of loss; it does not set the chain in motion.
- BAn indirect loss is a consequence of a direct loss, not its cause.
- CAn intervening cause is the opposite idea, an independent event that breaks the chain.
- DCorrect: the proximate cause is the first event in an unbroken chain that leads to the loss.
- Item 05
Before inception, an insurer and a collector agree that a painting is worth $50,000, and that amount will be paid for a total loss without any depreciation calculation. This valuation method is:
- AReplacement cost is figured after the loss from the cost to replace new.
- BStated amount pays the least of the stated amount, ACV or repair cost, so it can pay less than the figure.
- CACV subtracts depreciation after the loss, which is exactly what this agreement avoids.
- DCorrect: agreed value fixes the payout for a total loss before inception, with no depreciation.
- Item 06
A frayed electrical cord starts a fire that damages a house. In insurance terms, the frayed cord and the fire are, respectively, a:
- AThe fire is not a risk; risk is the uncertainty of loss.
- BThis reverses the two: the cord is the hazard and the fire is the peril.
- CThe frayed cord is a condition, not risk, which is the uncertainty of loss.
- DCorrect: the frayed cord is a physical hazard that raises the chance of loss, and the fire is the peril that causes it.
- Item 07
Why do standard property policies exclude losses caused by war and nuclear hazard?
- A'Always intentional' overreaches; the exclusion rests on the size of the loss, not intent.
- BWar and nuclear events are excluded because they are huge, not because they are rare.
- CCorrect: war and nuclear events could hit huge numbers of insureds at once, a catastrophic exposure insurers cannot spread.
- DNo government program automatically covers these losses under a property policy.
- Item 08
A home insured for $300,000 has a 2% windstorm deductible. A windstorm causes $20,000 of covered damage. How much will the insurer pay?
- A$19,000 applies a flat $1,000 deductible instead of the 2% windstorm deductible.
- BCorrect: the 2% deductible applies to the $300,000 amount of insurance, so $20,000 − $6,000 = $14,000.
- C$6,000 is the deductible the insured bears, not the insurer's payment.
- D$19,600 applies the 2% to the loss instead of the amount of insurance.
- Item 09
A fire damages a restaurant's kitchen, and the restaurant loses $30,000 of income while it is closed for repairs. The lost income is an example of:
- ACorrect: lost income while the restaurant is closed is a financial consequence of the damage, an indirect loss.
- BThe peril is the fire, not the income it cost.
- CThe direct loss is the fire damage to the kitchen itself.
- DSpecial damages is a liability term for what a defendant owes a claimant.
- Item 10
A building worth $400,000 at the time of loss is insured for $270,000 under a policy with a 90% coinsurance clause and a $1,000 deductible. A covered loss of $60,000 occurs. How much will the insurer pay?
- A$45,000 applies the coinsurance penalty but forgets the $1,000 deductible.
- B$39,500 compares the limit with the full $400,000 value instead of the 90% requirement.
- CCorrect: $270,000 ÷ $360,000 = 75% of $60,000 is $45,000, minus the $1,000 deductible is $44,000.
- D$59,000 ignores the coinsurance penalty for carrying less than 90% of value.
- Item 11
After a fire, the homeowner never files a proof of loss. Under the standard mortgage clause, what happens to the mortgage lender's claim?
- ACorrect: the mortgage clause lets the lender file its own proof of loss within 60 days after notice of the owner's failure.
- BThe mortgage clause does not require the lender to sue the homeowner first.
- CThe owner's inaction does not wipe out the lender's rights under the mortgage clause.
- DThe lender still has to file a proof of loss; it just may file its own.
- Item 12
Which of the following is an example of a direct loss?
- ACorrect: smoke damage to the walls is physical damage caused directly by a peril, a direct loss.
- BExtra cost of temporary space is extra expense, an indirect loss.
- CRent lost during repairs is a consequential, indirect loss.
- DLost profits during a shutdown are business income, an indirect loss.
- Item 13
Rosa insures a rare painting for $80,000 under a valued (agreed value) policy. It is destroyed in a fire when its market value is $65,000. How much will Rosa receive?
- A$65,000 is market value at the time of loss, the ACV approach a valued policy avoids.
- B$64,000 wrongly applies an 80% factor to the agreed amount.
- CCorrect: a valued policy pays the agreed $80,000 for a total loss, regardless of market value.
- D$52,000 wrongly applies an 80% factor to the market value.
- Item 14
A covered fire makes a family's home unlivable. Their normal food cost is $800 per month, but while living in a hotel they spend $1,300 per month on meals. Additional living expense pays how much per month for food?
- A$1,300 would reimburse food the family would have bought anyway.
- B$800 is the normal food bill, which the family pays regardless of the fire.
- CCorrect: additional living expense pays only the increase over normal costs, $1,300 − $800 = $500.
- D$0 wrongly assumes food is never covered; the extra cost of eating out is.
- Item 15
A homeowners policy limits theft of jewelry to $1,500 even though the personal property limit is $150,000. The $1,500 cap is a:
- ACorrect: a special limit, or sublimit, caps one category of property within the overall coverage limit.
- BA deductible is the insured's retained part of each loss, not a cap on a property class.
- CCoinsurance is an insurance-to-value requirement.
- DAn aggregate limit caps all payments over a period, not one property class.
- Item 16
Insurer A ($50,000 limit) and Insurer B ($150,000 limit) both cover a loss of $120,000 under contribution by equal shares. How much does Insurer A pay?
- A$60,000 splits the loss evenly but ignores that A's limit is only $50,000.
- B$70,000 is B's total payment after A is exhausted.
- C$30,000 is the pro rata share, 50/200 of the loss, a different method.
- DCorrect: under equal shares both pay equally until A's $50,000 limit runs out, and B pays the rest.
- Item 17
What does an inflation guard endorsement do on a property policy?
- AThe increase is charged at inception, not only at renewal.
- BSuspending coinsurance is what agreed value does, not inflation guard.
- CInflation guard keeps the valuation basis unchanged; only the limit grows.
- DCorrect: inflation guard raises the limit automatically by a stated annual percentage.
Six checks for any dollar answer
- Which valuation does the policy use: ACV, RC, agreed or stated?
- Is the value taken at the time of loss?
- Does a coinsurance clause or an 80% replacement cost condition apply?
- Under this form, does the deductible come off before or after the penalty?
- Is there a sublimit below the policy limit? The 2011 HO-3, for one, caps theft of firearms at $2,500.
- Does another policy cover the same property, and which clause splits the loss?