Property Insurance Fundamentals
Personal lines property coverage — Homeowners (HO), Dwelling (DP), and personal Inland Marine — all rest on the same vocabulary: how perils are listed, what is excluded everywhere, how property is valued, and how shared interests in the property are protected. This chapter builds the foundation that the later Homeowners and Dwelling chapters will apply. Expect about 10% of the exam from this material, with a heavy emphasis on coinsurance math, ACV vs. replacement cost, and the mortgagee clause.
Named Peril vs. Open Peril (Special) Coverage
Property policies describe what is covered in one of two ways. A NAMED PERIL form lists each covered cause of loss, and the burden is on the INSURED to prove that the loss was caused by a listed peril. The HO-2 Broad Form and DP-1/DP-2 dwelling forms are classic named peril policies. An OPEN PERIL form (also called 'all risk' or special form) covers ALL causes of loss EXCEPT those specifically excluded; the burden flips, and the INSURER must prove that an exclusion applies in order to deny. The HO-3 Special Form combines open-peril coverage on the dwelling and other structures with named-peril coverage on personal property; the HO-5 Comprehensive extends open-peril coverage to personal property as well. Open peril is broader and more expensive but eliminates the gaps that show up when a loss is caused by something the named list forgot.
Basic and Broad Form Perils
Named peril forms group covered causes into tiers. The BASIC FORM perils are commonly remembered with the mnemonic FELLW with extended coverage: Fire, Explosion, Lightning, Wind/hail, plus Smoke, Vehicles, Aircraft, Vandalism, Riot/civil commotion, Sinkhole collapse, and Volcanic action. The BROAD FORM (HO-2 / DP-2) adds further perils that homeowners commonly experience: falling objects; weight of ice, snow, or sleet; accidental discharge of water or steam from a household appliance or plumbing; sudden and accidental tearing apart of a heating system or water heater; freezing of plumbing; and sudden and accidental damage from artificially generated electrical current. Together these tiers define what a named-peril homeowner or dwelling policy will actually pay for; anything outside the list is uncovered no matter how clearly it caused the loss.
Common Property Exclusions
Every personal property policy contains a similar list of exclusions. The most important for California exam purposes are EARTH MOVEMENT (earthquake, landslide, mudslide, sinkhole except as added by endorsement), FLOOD AND SURFACE WATER (covered separately by the National Flood Insurance Program), WAR and nuclear hazard, GOVERNMENTAL ACTION and ordinance or law (the extra cost to rebuild to current code), and INTENTIONAL LOSS by the insured. Maintenance-type losses are also excluded: WEAR AND TEAR, gradual deterioration, rust, mold, vermin, smog, settling, and mechanical breakdown. These exclusions are not a gap in the insurer's promise so much as a reminder that property insurance covers SUDDEN AND ACCIDENTAL events, not the slow consequences of aging or owner neglect.
Real Property vs. Personal Property
Personal lines policies divide what can be insured into real and personal property. REAL PROPERTY is land and anything permanently attached to it: the dwelling itself (Coverage A in a Homeowners policy), other structures such as a detached garage or shed (Coverage B), built-in cabinetry, the furnace, plumbing fixtures, and any fixture that would damage the structure if removed. PERSONAL PROPERTY is everything else the insured owns and moves with them: furniture, clothing, electronics, kitchenware (Coverage C). The distinction matters because real property is usually covered on a REPLACEMENT-COST basis up to Coverage A limit while personal property is usually settled at ACTUAL CASH VALUE unless the insured buys a personal-property replacement-cost endorsement. Certain items of personal property (jewelry, firearms, cash, business property) also carry SPECIAL LIMITS that often need a scheduled personal property endorsement to fully insure.
Replacement Cost vs. Actual Cash Value
Valuation is how the insurer puts a dollar figure on the loss. REPLACEMENT COST (RC) is the amount it would take TODAY to replace the damaged item with one of like kind and quality, with no deduction for depreciation. ACTUAL CASH VALUE (ACV) is replacement cost MINUS depreciation; California Insurance Code §2051 defines ACV for structures as the amount it would cost to repair or replace using materials of like kind and quality, with no deduction for physical depreciation for partial losses. RC therefore pays MORE than ACV for older property: an 18-year-old roof destroyed by hail at $25,000 RC might be paid as only $10,000 ACV after depreciation. Most California homeowners policies pay the dwelling at RC and personal property at ACV unless an endorsement upgrades the contents to RC. RC settlements are typically conditioned on actually completing repairs within 12 to 24 months — until then, the insurer pays ACV and holds back the depreciation.
80% Coinsurance Penalty Math
A coinsurance clause requires the insured to carry insurance equal to a stated percentage (typically 80%) of the property's replacement cost. If the insured under-insures, the policy will pay losses in the SAME proportion that the amount carried bears to the amount that should have been carried, and the insured absorbs the rest. The standard formula is: (Amount of insurance CARRIED / Amount of insurance REQUIRED) × Loss = Payment, capped at the policy limit and reduced by any deductible. Example: a home with $500,000 replacement cost is insured for $300,000; the 80% requirement is $400,000. A $40,000 partial loss is paid (300,000 / 400,000) × 40,000 = $30,000 (subject to deductible). The insured absorbs the remaining $10,000 as a coinsurance penalty. Coinsurance only applies to PARTIAL losses; a total loss is paid up to the policy limit regardless. California Insurance Code §2071 contains the standard form fire policy language that underlies these calculations.
Mortgagee Clause: Standard vs. Open; 10-Day Cancellation Notice
When a home is mortgaged the lender has a financial interest in the property and is named on the policy as MORTGAGEE (loss payee). The STANDARD (sometimes called UNION) mortgagee clause is by far the more protective and is what California lenders require. Under it the mortgagee's rights cannot be defeated by acts or neglect of the insured (so the lender is still paid even if the borrower commits a fraud that voids the policy for the homeowner). The mortgagee receives a separate copy of the policy and direct notice of cancellation: in California a standard mortgagee clause requires the insurer to give the mortgagee at least 10 DAYS' written notice before cancellation for any reason (and longer notice for non-payment in some forms). The OPEN mortgagee clause, in contrast, has no such protection: if the insured's conduct voids the policy, the lender's coverage is also gone. Open mortgagee clauses are rare and generally unacceptable to institutional lenders.
Vacancy & Unoccupancy (60-Day Rule), Pair-and-Set, Salvage
Three smaller doctrines round out property fundamentals. VACANCY means the dwelling contains neither people nor furnishings; UNOCCUPANCY means furnishings remain but no one is living there. Under the standard homeowners and dwelling forms, if the dwelling is VACANT for more than 60 CONSECUTIVE DAYS before a loss, certain perils are excluded or reduced — typically vandalism, glass breakage, water damage, theft, and damage by ice/snow — and vandalism losses may be denied entirely. The PAIR-AND-SET clause says that loss to ONE item of a pair or set (a single earring, one chair from a dining set) is valued as a fair proportion of the value of the whole, not by treating the entire set as destroyed and not by ignoring the lost value to the remaining piece. SALVAGE is the right of the insurer, after paying a total loss, to take possession of damaged property and recover what value it can; the insured cannot keep both the insurance proceeds AND the salvage.
Last updated: May 2026