Property Insurance Basic Principles and Concepts
Insurance is the commercial entity you have come to know, is essentially a way to spread out risk over a large group of people. More precisely, it spreads the financial burden over a large group of people. The key word here is a risk, as in uncertainty; insurance does not cover things that are expected to happen.
For a risk to be considered insurable, it must meet specific criteria. In a nutshell, the risk of a particular loss or damage must be common enough to be predictable, but not occur so often that it would happen to all of an insurance company’s customers at the same time. Of course, each company has their own criteria, and they can vary geographically.
The National Association of Insurance Commissioners (NAIC) defines property insurance as ‘coverage protecting the insured against loss or damage to real or personal property from many perils.’ Property insurance is not to be confused with liability insurance. The former will pay for loss or damage to the named property, as well as medical costs of any injuries sustained on that property. Liability insurance will pay a third party for damages caused by the insured person.
Types of Property Insurance
Property insurance has many forms, and they fill these general categories:
– Dwelling insurance covers the physical structure of a home.
– Homeowners insurance covers not only the structure but belongings inside, as well as medical costs incurred as a result of someone injured on the property.
– Commercial property insurance covers the building a business owns or leases, as well as any physical assets the company owns.
– Inland marine insurance is a misnomer because it covers property transported over land. The marine portion of the name dates back to a time when this insurance was a part of ocean marine insurance.
– Ocean marine insurance, however, covers property transported on the ocean.
– Crime insurance protects against losses due to fraud by a third party or employee.
What is Covered
When describing the property of the insured, an insurance policy can be specific, by naming a particular item, or general, by naming a location where all property is covered. Blanket insurance can state that an insured’s property is included no matter its location. Real estate falls under the purview of property insurance, as does tangible and intangible personal and business property. Intangible property is something that intrinsically is worth nothing, but it represents an asset — like treasury bonds.
What You Are Protected Against
Once the property that is to be covered is established, the perils that are to be insured against must be determined. There are two types of peril that a company will insureagainst, named / specific peril and open peril. As the name suggests, a specific or named peril policy lists the covered causes of loss. An open peril policy covers all risks of loss other than those listed as an exclusion to coverage.
Types of Loss to Consider
The type of loss is also defined in an insurance policy. There is a direct loss, and there is a consequential loss. Direct loss is the monetary loss resulting from a named peril. Consequential loss is the result of a direct loss, such as the income loss from a damaged business. Typically, a policy will insure you against one type, but not both. The one type of loss that is never covered by an insurance company is a non-accidental loss; the expected loss that is not a risk, such as an item wearing out. This is an example of an exclusion, of which there are many in an insurance policy.
There are some perils that insurance companies will not insure. In some cases, it would be disastrous for an insurer to have to pay. There are five general types of losses not covered, including the non-accidental loss mentioned above:
– Damages that are preventable, such as those caused by carelessness.
– Extra-hazardous perils that are such that they would need increases in an insurance premium to be covered. These perils often have specific policies that can be purchased to protect your property if you choose. The most common example is an earthquake.
– Catastrophic losses that are so significant, that an insurance company would not be able to cover them financially. It is a peril that would involve so many policyholders that it would be impossible to reimburse all of them. War is the most commonly used example.
– Property insurance will not cover property covered by other policies. Think of a car; it is already covered by auto insurance.
Responsibilities of Both Parties
When a loss occurs, both the policyholder and the insurer have things that they are obligated to do. These are listed in the loss provisions part of an insurance policy. The insured is expected to report the loss promptly, prove the loss, and allow inspection of the property, if available.
The insurer has the responsibility to compensate the insured adequately for the loss or damage. Usually, the insured can expect to receive the lesser of the policy limits, the real cash value, the cost to repair, or the cost of replacement. For items that cannot be replaced like antiques, the property is either repaired, if possible, or replaced with a reasonable facsimile. An insurance company will compensate the insured after the deductible is met. The deductible keeps the cost of insurance down, by reducing the amount of money paid out in lesser claims, reserving payouts to more expensive, less common claims.
Shopping for Property Insurance
The most important part of shopping for property insurance is to take a complete inventory of the property. Once the value is established, you can buy the right amount of insurance. Also, make a good assessment of the extraordinary risks that the property may be subject to, such as being in earthquake-prone areas, and consider the need for special policies. As for any big decision, educating yourself ensures that you will get the insurance best suited to your needs.