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3.4 Common Property Policy Conditions

Coinsurance​

**Insurance to value **means carrying enough property insurance to cover the full value of the insured property if a total loss occurs. For example, assume a home has an estimated replacement value of $500,000, but the owner purchases only $300,000 in coverage. The home is not insured to its full value because the policy limit would not be sufficient to pay for the entire loss. As a result, the insured could be responsible for a significant portion of the cost to repair or replace the property after a total loss.

To encourage insureds to maintain adequate insurance to value, many property insurance policies include a coinsurance provision. This provision requires the insured to carry insurance equal to a specified percentage of the property's value, commonly 80%. When the insured meets the coinsurance requirement, covered losses may be paid in full, up to the policy limit and subject to any applicable deductible. If the insured carries less insurance than required, the insurer may reduce the claim payment in proportion to the amount of coverage maintained.

The coinsurance formula is:

Coinsurance Percentage x Current Replacement Cost = Amount of Insurance Required

Amount of Insurance Carried / Amount of Insurance Required x Amount of Loss = Amount Payable before deductible

The coinsurance provision generally applies only to partial losses. If a total loss occurs, the insurer will pay the covered loss up to the policy's stated limit of insurance, subject to the policy's terms, conditions, and applicable deductible.

Example

An insured owns a building with a current replacement cost of $100,000. The building is insured for $40,000, and the policy contains an 80% coinsurance requirement. A fire causes a covered partial loss of $10,000.

First, determine the minimum amount of insurance required under the coinsurance provision:

$100,000 × 80% = $80,000 required insurance

The insured carried only $40,000 of insurance. Therefore, the insured maintained only 50% of the required amount:

$40,000 ÷ $80,000 = 0.50

Next, multiply this percentage by the amount of the covered loss:

0.50 × $10,000 = $5,000

The insurer would pay $5,000 because the insured carried only 50% of the amount of insurance required by the coinsurance provision.

Had the insured maintained at least $80,000 in coverage, the $10,000 covered loss could have been paid in full, subject to the policy limit and any applicable deductible. Because no deductible is provided in this example, assume that no deductible applies.

Insurer Provisions​

Loss Settlement​

This policy condition identifies the loss valuation method used to determine the value of covered property at the time of a loss. The insurer calculates the claim payment according to the valuation method stated in the policy, such as actual cash value or replacement cost. However, the insurer will not pay more than the actual amount required to repair, rebuild, or replace the damaged property. The claim payment is also limited by the applicable policy limit and remains subject to the policy's terms, conditions, and deductible.

Loss Payment​

This policy condition explains how the insurer will settle and pay a covered loss. It also identifies the required deadlines for submitting claim-related documents and completing other steps in the claims process.

Right of Salvage​

The right of salvage allows an insurer to take possession of damaged property after paying the insured for the covered loss. Once the claim is paid, ownership of the salvaged property transfers to the insurer, which may sell, repair, or otherwise dispose of it.

Named Insured Provisions​

Abandonment of Property​

Abandonment occurs when an insured attempts to surrender damaged property to the insurer and expects the insurer to assume responsibility for its repair, removal, or disposal. Property insurance policies generally prohibit abandonment, meaning the insurer is not required to accept the property. Unless the insurer chooses to take possession of the property, the insured remains responsible for arranging its repair, removal, or disposal.

Third-Party Provisions​

Mortgage Clause​

In a property insurance policy, the mortgage clause explains how the policy protects a mortgagee's financial interest in the insured property. A mortgagee may receive payment only up to the amount of its insurable interest. When more than one mortgagee is listed, payment is made according to each mortgagee's order of priority.

Even when the insured's claim is denied, the mortgagee may still be eligible to recover under the policy if it satisfies the required conditions. The mortgagee must:

  • Pay any premium due upon the insurer's request if the insured fails to make the payment.
  • Notify the insurer of any known change in ownership, occupancy, or substantial increase in risk.
  • Submit a proof of loss if the insured fails to do so, usually within 60 days after receiving notice of the insured's failure.

These requirements allow the mortgagee to preserve its separate rights under the policy.

If the insurer intends to cancel or nonrenew the policy because the insured failed to pay the required premium, the insurer must provide the mortgagee with advance written notice. This notice period is typically 10 days and gives the mortgagee an opportunity to pay the outstanding premium and help prevent the policy from terminating.

Example

An insured purchases a home for $300,000, makes a $50,000 down payment, and finances the remaining $250,000 through a mortgage. The home is insured for $300,000. If a covered fire completely destroys the home, the insurer would pay the mortgagee up to $250,000 to satisfy its financial interest in the property. The remaining $50,000 would be payable to the insured, subject to the policy's terms and conditions. The mortgagee may retain separate protection under the mortgage clause even when the insured violates a policy condition that could result in denial of the insured's claim. For example, if the insured fails to pay the premium, the mortgagee may still recover up to its $250,000 insurable interest, provided the mortgagee complies with the policy's requirements.

Loss Payable Clause​

Similar to the mortgage clause, the loss payable clause identifies a loss payee that has a financial interest in the insured property. A loss payee may be a creditor, lender, or lienholder. If a covered loss occurs, the insurer may issue payment to the loss payee before paying the insured, but only up to the amount of the loss payee's insurable interest in the damaged property.

No Benefit to Bailee​

Property insurance coverage generally does not apply when a claim payment would benefit a bailee. A bailee is a person or business that temporarily possesses another person's property and is responsible for protecting it while it is in the bailee's care, custody, or control. Because the bailee has a legal responsibility for the property, the property owner's policy generally does not cover losses for which the bailee is responsible. Instead, the bailee may purchase commercial property coverage designed to insure the property of others in its care, custody, or control.

An Insurance Story

Sofia takes several work outfits to a dry cleaner. While the clothing is in the dry cleaner's care, an accidental fire damages some of the items. Because the dry cleaner is acting as a bailee and is responsible for the clothing in its care, coverage for the damage would generally come from the dry cleaner's insurance rather than Sofia's property insurance.

Pair or Set Clause​

The Loss to a Pair or Set condition explains how the insurer will settle a partial loss involving property that is part of a matching pair or set, such as one earring from a pair or one piece from a fine china collection. This condition recognizes that a complete pair or set may have greater value than its individual pieces considered separately. Therefore, the loss of or damage to one item may reduce the value of the remaining item or items, even though they are not physically damaged.

When a covered loss affects only part of a pair or set, the insurer may choose one of the following settlement options:

  • Repair or replace the damaged or missing item to restore the pair or set to its value before the loss.
  • Pay the difference between the property's actual cash value immediately before the loss and its actual cash value after the loss.

An Insurance Story

Sofia owns a matching pair of diamond earrings. Each earring has an individual value of $800, for a combined value of $1,600. However, because the earrings form a matching pair, the set is valued at $2,000. Therefore, the pair has an additional $400 in value. If one earring is stolen, the loss includes both the $800 value of the missing earring and the $400 reduction in value caused by breaking up the pair. The total loss in value is $1,200.

Appraisal​

The appraisal condition provides a method for resolving disagreements about the amount of a covered property loss. Either the insured or the insurer may request an appraisal. Each party selects and pays for its own qualified appraiser. The two appraisers then select an impartial umpire. The appraisers separately determine the value of the damaged property and the amount of the loss. If they disagree, they submit their findings to the umpire. An agreement reached by any two of the three participants establishes the amount of the loss. The insured and insurer share the cost of the umpire and any other appraisal expenses. Appraisal determines only the value of the property or the amount of the loss; it does not determine whether the policy provides coverage.

Recovered Property​

If lost or stolen property is recovered after the insurer has paid the claim, the party that recovers the property must promptly notify the other party.

The insured may then choose one of two options:

  • Keep the insurance payment and transfer the recovered property to the insurer.
  • Keep the recovered property and return the claim payment to the insurer.

If the insured chooses to keep the recovered property, the insurer will generally pay the reasonable costs required to recover and repair it, subject to the policy's terms and limits.