2.5 Common Property Policy Conditions and Clauses

Conditions: The Rules Both Parties Must Follow

Every property policy is built from the same parts: the Declarations (the "Dec page" — who, what, where, limits, deductible, premium), the Insuring Agreement, Exclusions, Conditions, and Definitions (often remembered as DICED). Conditions are the rules that govern how the contract operates — the insured's duties after a loss, how disputes are resolved, and the insurer's rights. Many exam questions hinge on a single condition, so each must be understood by name and effect.

Duties After Loss and Proof of Loss

After a covered loss the insured must: give prompt notice, protect the property from further damage (mitigate), prepare an inventory of damaged property, allow inspection, cooperate, and submit a sworn Proof of Loss, usually within 60 days of the insurer's request. Failure to perform these duties — especially submitting a timely proof of loss — can bar or delay recovery.

Related conditions:

• Appraisal — when the insurer and insured agree there is a covered loss but disagree on the amount, either party may demand appraisal. Each side picks a competent appraiser; the two pick an umpire; agreement by any two binds the amount. Appraisal decides value, not coverage.
• Examination under oath (EUO) and producing records are conditions the insured must satisfy on request.

Loss-Settlement and Insurer-Rights Conditions

• Loss payment / settlement — the insurer typically has 30 days after reaching agreement (or a court judgment) to pay, and may repair, replace, or pay in money.
• Subrogation (transfer of rights of recovery) — after paying a claim, the insurer steps into the insured's shoes to recover from the at-fault third party. The insured must not impair these rights; a pre-loss waiver may be allowed, a post-loss waiver generally is not.
• Salvage — the insurer may take the damaged property after paying a total loss.
• Abandonment — the insured may not abandon property to the insurer.
• Other insurance / pro rata — when more than one policy covers the loss, each pays its pro rata share (limit ÷ total limits) so the insured is not overindemnified.
• Mortgage (mortgagee) clause — protects the lender's interest even if the insured's act would void coverage; the mortgagee gets notice of cancellation and may have separate rights to recover.

Cancellation, Nonrenewal, and Other Key Clauses

• Cancellation — the insurer's required notice varies (commonly 10 days for nonpayment, 30 days for other reasons), set by state law. The insured may cancel anytime; insurer returns unearned premium (pro rata when the insurer cancels, sometimes short-rate when the insured cancels).
• Concealment, Misrepresentation, or Fraud — a material misstatement or concealment can void coverage.
• Vacancy — if a building is vacant beyond 60 consecutive days, certain perils (vandalism, glass breakage, water, theft) are excluded or payments cut (often by 15%).
• Liberalization — if the insurer broadens coverage without added premium during the term, the insured automatically gets the broader terms.
• Assignment — the policy cannot be transferred to another party without the insurer's written consent.
• Pair-or-set — loss to one item of a set is valued by the reduction in value of the whole set, not full replacement.

Insurable Interest, Subrogation, and Salvage Conditions

Property policies carry standard conditions that the exam tests as recurring fact patterns. The insurable interest condition limits recovery to the extent of the insured's actual financial interest at the time of loss — preventing a profit from a claim and supporting the principle of indemnity. Subrogation transfers the insured's right to recover from a responsible third party to the insurer after payment; the insured must not impair that right (though pre-loss written waivers are allowed), and any recovery is generally applied first to the insured's uninsured loss.

Salvage lets the insurer take title to damaged property it has paid for in full, recovering value to offset the claim.

Other-Insurance, Appraisal, and Mortgagee Conditions

When more than one policy covers the same loss, the other-insurance condition allocates payment. Most property forms use pro rata sharing — each insurer pays its share of the limit relative to total coverage — while some use contribution by equal shares or excess provisions; a policy written as excess pays only after the primary limits exhaust. The exam expects you to compute a pro rata share: an insurer carrying $200,000 of a $500,000 total pays 40% of a covered loss.

The appraisal condition resolves disputes over the amount (not coverage) of a loss through independent appraisers and an umpire. The mortgagee (loss-payable) clause protects the lender's interest separately from the insured's: the mortgagee is paid even if the insured's own act (such as increasing the hazard or misrepresentation) would void the insured's claim, and the mortgagee gains rights to notice of cancellation and to pay premiums to keep coverage in force. The vacancy and duties after loss conditions round out the standard set.