1.3 Policy Structure & Common Provisions

The Parts of a Policy

Nearly every property and casualty policy is organized into the same standard parts. A common memory aid is "DICE" — Declarations, Insuring agreement, Conditions, Exclusions — plus definitions and endorsements.

Reading order matters on the exam: the insuring agreement grants coverage broadly, and the exclusions and conditions then narrow it.

Named-Perils vs. Open-Perils (All-Risk)

Property policies cover loss in one of two structures:

• Named-perils (specified-perils) — coverage applies only to the perils specifically listed in the policy (fire, lightning, windstorm, hail, vandalism, theft, etc.). If a peril is not named, it is not covered. The burden of proof is on the insured to show the loss was caused by a listed peril.
• Open-perils (all-risk / special form) — covers loss from any cause except those specifically excluded. This is broader coverage, and the burden of proof shifts to the insurer to prove an exclusion applies if it wants to deny a claim.

Because open-perils "covers everything not excluded," the exclusions list is where the real limits live. Named-perils is narrower and cheaper.

Proximate Cause

Proximate cause is the unbroken sequence of events, set in motion by a covered peril, that produces the loss. Coverage turns on whether the proximate (efficient, initiating) cause is insured — not necessarily the last event in the chain. Example: a covered windstorm topples a tree, which breaks a gas line, which causes a fire. If windstorm is covered, the entire resulting loss is covered because windstorm is the proximate cause, even though fire did the final damage.

The reverse also matters: if the initiating peril is excluded (say, flood) and it sets off a covered peril, an anti-concurrent-causation clause can still bar the whole loss. Producers must trace the chain back to its efficient cause to predict coverage.

How a Claim Is Paid: Deductibles, Limits, and Other-Insurance

When a covered loss occurs, several provisions shape the actual payment:

• Deductible — the amount the insured pays first; the insurer pays the rest up to the limit. Deductibles reduce small claims and lower premiums.
• Limit of insurance — the maximum the insurer will pay for a covered loss. Payment is the lesser of the loss, the limit, or the insurable interest.
• Coinsurance — a property clause requiring the insured to carry insurance equal to a stated percentage (commonly 80%, 90%, or 100%) of the property's value. Underinsuring triggers a coinsurance penalty that shifts part of every loss back to the insured.
• Other-insurance / pro rata — when more than one policy covers the same loss, each insurer pays its proportionate share so the insured is indemnified but does not collect more than the loss (upholding indemnity). Each insurer pays (its limit ÷ total of all limits) × loss.

Subrogation is the insurer's right, after paying a claim, to step into the insured's shoes and recover from the negligent third party who caused the loss. It prevents the insured from collecting twice and keeps the financial burden on the at-fault party. Salvage is the insurer's right to take and sell damaged property (a totaled car, smoke-damaged stock) after paying the claim, recouping part of its payout. Both reinforce the principle of indemnity.

Worked Example: The Coinsurance Penalty

The coinsurance formula is a guaranteed exam item. After confirming the required amount (value × coinsurance %), apply:

Payment = (amount of insurance carried ÷ amount of insurance required) × loss − deductible

Scenario: A building is worth $500,000. The policy has an 80% coinsurance clause and a $1,000 deductible. The owner carries only $300,000 of insurance. A fire causes a $100,000 loss. What does the insurer pay?

1. Amount required = $500,000 × 80% = $400,000.
2. Coinsurance ratio = carried ÷ required = $300,000 ÷ $400,000 = 0.75 (75%).
3. Apply the ratio to the loss = 0.75 × $100,000 = $75,000.
4. Subtract the deductible = $75,000 − $1,000 = $74,000 paid.

The owner absorbs the remaining $26,000 as the coinsurance penalty for underinsuring. Two cautions: (1) payment can never exceed the policy limit, and (2) if the insured had carried at least the required $400,000, no penalty would apply and the insurer would pay the full $100,000 loss minus the deductible. Coinsurance rewards carrying adequate limits and penalizes underinsurance — its purpose is to encourage insureds to insure to value so premiums remain equitable across the pool.

A final caution on combining provisions: apply the coinsurance ratio to the loss first, then subtract the deductible — reversing the order produces the wrong answer. And when two policies overlap, the pro rata other-insurance clause divides the loss by each policy's share of the total limits, so the insured is fully indemnified but never collects more than the loss.