Property Insurance Fundamentals
This chapter explains how property losses are valued and paid: named versus open perils, actual cash value versus replacement cost, and the mechanics of deductibles, coinsurance, and coordination of multiple policies. These rules are the same in every state.
Named Perils vs. Open Perils
A named-perils (specified perils) form covers only the perils listed in the policy, so the insured must prove the loss came from a listed peril. An open-perils (all-risk) form covers any cause of loss that is not specifically excluded, shifting the burden to the insurer to prove an exclusion applies. Open-perils coverage is broader and generally costs more. Common excluded causes across property forms include wear and tear, intentional acts, and typically flood and earth movement unless added.
Valuation: ACV vs. Replacement Cost
Actual cash value (ACV) equals replacement cost minus depreciation for age and wear, reflecting what property is worth at the time of loss. Replacement cost coverage pays to repair or replace with new property of like kind and quality without a depreciation deduction, subject to policy conditions such as actually repairing or replacing. A third method, agreed value, sets a value in advance for hard-to-value items. Choosing the right valuation basis is central to matching a claim payment to the insured's true loss.
Deductibles and Coinsurance
A deductible is the amount the insured pays before the insurer pays; it lowers premium and discourages small claims. Coinsurance is a property provision that requires the insured to carry insurance equal to a stated percentage (often 80%) of the property's value. If the insured is underinsured at the time of loss, a penalty applies: the insurer pays (amount carried / amount required) x loss. For example, carrying $300,000 when $400,000 is required means the insurer pays 75% of a covered loss, and the insured absorbs the rest.
Other Insurance and Subrogation
When more than one policy covers the same loss, an other-insurance clause, often on a pro rata basis, splits the loss so the insured is indemnified but not overpaid. Subrogation lets an insurer that has paid a claim recover from the third party who caused the loss, preventing double recovery. Salvage rights allow the insurer to take and sell damaged property it has paid for. All of these mechanisms reinforce indemnity by keeping recovery equal to, not greater than, the actual loss.