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Main Body

Property Insurance Basics

Principles and concepts

Insurable interest

You must have ownership or a personal interest in the property in order to carry insurance.


The process of evaluating a property to determine eligibility and insurability. Underwriting process is selecting, classifying and determining pricing.


The insurer assesses the degree of risk and takes on that financial risk for a fee

\Loss ratio

The ratio of incurred losses and the loss-adjustment expenses to earned premiums


Determines the price and calculation of insurance premiums. Price per unit of insurance.


Pure rate is the portion designed to cover anticipated future losses. The gross rate is a factor called loading that will cover the insurer’s anticipated operating expenses.

Class rates applies to categories with average cost of unit per insured made up of similar insureds.

A specific rate is designed for a one insured taking into account their individual risks characteristics.

Loss costs

The pure premium or pure cost are the actual or expected cost to the insurer including the amount to cover claims, as well as the cost to administer and investigate those claims


The parts of the policy, including premium, policy limit and deductible.


An act or condition that Increases the possibility or severity of a loss. This can be location, type of exposure, occupancy of a building, or the type of structure.


Physical condition that increases the chances of a loss


An increased chance of loss due to dishonesty or character defect. This may occur because of financial difficulties and result in more losses with increasing severity.


Indifference or carelessness to a loss.

Causes of loss

An event that will create a possible insurance exposure or loss.

Named Perils versus Special (Open) Perils

Named perils are specifically listed causes of loss. Special perils will include everything except what is specifically excluded.

Direct Loss

An insured peril results in a financial loss. These are the immediate losses from a covered peril

Consequential or indirect loss

This is a result of the direct loss. For example, your house is damaged by a tornado, so now you must stay in a hotel and eat your meals in a restaurant.

Blanket versus specific loss

Specific limit applies to of piece of property or item while blanket applies to multiple types of property

Basic types of construction

Ex: Frame: wood construction, Masonry: concrete

Loss valuation

Actual cash value (ACV)

Replacement cost minus depreciation

Replacement Cost

Property insurance which indemnifies the insured with no deduction for depreciation

Functional replacement cost

The cost to repair or replace damaged property, less to cost of the construction materials that are equivalent to the item damaged.

Market value/repair cost

The amount the property can sell for or the repair price

Agreed value

These will be property more difficult to determine value like antiques or art. Often appraisals will be needed prior to adding to the policy.

Stated amount

Often used for antique vehicles. Policy will list the stated value, actual cash value, or the cost to repair or replace. Typically which ever amount is the least.

Valued Policy

This can apply various losses, properties or perils. This pertains to real property only in which the full amount of insurance coverage is paid when a total loss occurs.



Policy Structure

Declarations Page

First page of the insurance policy. You will find the insured’s name, policy period, Insurer information, policy amount and coverages amounts, deductible. This information is used in underwriting and rating.


Key words and phrases are made clearer so that the policy can be understood more clearly.

Insuring agreement or clause

Summarizes the obligations of the insurer. The insurer agrees to pay certain losses, provides certain services and agrees to defend the insurer in a liability lawsuit,

Additional/supplementary coverage

Additional coverage that the insured can purchase in excess to the primary coverage, usually at an additional premium



Will specify limitations on the insurer’s promise to pay. Duties of the insured will be included in this section.


The portion of the insurance contract that the insurer will not cover. This can include excluded perils, losses and property


The provision in the insurance contract that adds to, deletes from or modifies the original contract.


Common policy provisions


Names, first named and additional. Named Insured’s are persons, corporations, partnerships, or any other entity identified as an insured party in an insurance policy. The First Named Insured holds all the power and decision-making regarding the policy itself.

Policy period

The stated start and end date on the insurance policy. The Policy Period is the date of policy inception until the date the policy itself expires. This is typically shown in one-year periods, or annually. Some certain policy will have a six-month policy period.

Policy territory

The Policy Territory is the location listed on the policy that is determined and mapped out by the insurance company.

Cancellation and nonrenewal

Cancellation and Nonrenewal are very similar yet different. If your policy cancels, that means it will cancel right now or in the very near future. Nonrenewal means that the insurer will not be offering you another policy when your policy period ends. The named insured are allowed to cancel the policy at any time. The insurer can cancel the policy for various reasons guided by statutes set for by the state regarding reasons or timing of the cancellation.




The portion of the claim the insured will pay before the insurance company pays. Deductibles will be stated in your policy. This will be a dollar amount that you as the insured are responsible for in the event you sustain a covered loss.

Other insurance

Sometimes two policies are covering the same exposure. If these policies are concurrent then they will share the amount of the loss evenly between the two. Additionally, the two policies that are covering the same loss but the first policy must pay their entire limit before the second policy pays is considered Primary VS. Excess. The first policy would be primary and the second excess.

– The “Per Occurrence,” or “ Per Claim,” limit refers to the total amount the insurance company will pay per incident during the policy term. The “Aggregate” limit is the total amount the insurance company will pay for multiple claims over the course of one policy term (which is often one year).

Per Person is the maximum amount the insurer will pay for one person’s injuries

Non Currency

A situation where two or more policies cover the same loss exposure, but do not carry the same start and expiration dates

Primary and Excess

Primary Is the policy that pays for the coverage first. Excess will pay with the loss exceeds the stated amount on the primary policy

Pro Rata

Claims will be paid out in proportion to the insurance interest in the asset

Property limits

The amount listed on the declaration page stating the limits of coverage

Restoration/nonreduction of limits


The provision that states the insured must share in the costs of the loss if the insured amount is less than the specified percentage of the properties insured vales

** 80%**

Vacancy or unoccupancy

A property is vacant when there is no personal property remaining in the home. Unoccupancy is when the property still has furnishings, but no one is living there. There can be coverage issues with both situatuions.

Named insured provisions

The names insured in the policy declarations

Duties after loss

The insured is responsible to contact the insurer immediately after a loss and report the claim. Duties after a loss included, communicating the loss to the insurer promptly, contacting police (if necessary), cooperate with all involved parties, and ensure further damage won’t occur.


Who owns the policy, listed on the declarations page


Stated in the policy prohibiting the insured from abandoning property to the insurer for repair or disposal

Insurer provisions


A liberalization clause is an insurance policy provision allowing adjustments to existing coverage to comply with changes to laws and regulations.


Subrogation is a process that after an insurer paid a loss under the policy, it can recover the amount paid from the responsible party who caused the loss or is legally liable.

Duty to Defend

A term used to describe an insurer’s obligation to provide an insured with defense to claims made under a liability insurance policy


The property that the insurer takes after paying for the claim. The insurer may also choose to deduct the salvage amount and return the property to the insured

Claim settlement options

Third party provisions

Standard Mortgage clause

The mortgage clause covers each lender listed in the policy for loss or damage to the building or structure in which the lender has an interest. A lender has an insurable interest in mortgaged property because the building serves as collateral for the loan.

Loss payable clause

A loss payable clause is an insurance contract endorsement where an insurer pays a third party for a loss instead of the named insured or beneficiary. The loss payable provision limits the rights of the loss payee to be no higher than the rights guaranteed to the insured.

No Benefit to the Bailee

If the insured’s property is in possession of a Bailee and the property is damaged the Bailee will not receive any benefit from the insured’s policy for the damages.
















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