This topic is the foundation of the combined Property and Casualty exam: how a policy is built, how property losses are valued and paid, and the liability law that decides when someone owes damages. Nearly every policy question later in the exam (homeowners, auto, commercial) leans on these ideas. Form references are to ISO's homeowners form (HO 00 03 05 11), Building and Personal Property form (CP 00 10 10 12), Commercial General Liability form (CG 00 01 04 13) and Common Policy Conditions (IL 00 17). States and insurers can amend these forms; the figures below are what the ISO forms say.

Risk vocabulary in one minute

• Pure risk (loss or no loss) is insurable; speculative risk (chance of gain, as in gambling or investing) is not.
• A peril causes a loss (fire, theft). A hazard makes a loss more likely or worse: physical (oily rags), moral (dishonesty, such as arson for profit), morale (carelessness because "it's insured").
• Ways to handle risk: avoid, retain (deductibles, self-insurance), reduce (sprinklers, alarms), transfer (insurance, hold harmless agreements) and share.
• The law of large numbers makes losses predictable across a big group of similar exposures.

How a policy is put together (DICE)

• Declarations: named insured, policy period, covered property, limits, deductibles, premium.
• Insuring agreement: the insurer's promise to pay.
• Conditions: the rules and duties for both sides (notice, proof of loss, cancellation).
• Exclusions: what is not covered.
• Definitions explain words shown in quotation marks ("insured," "occurrence"). Endorsements add, remove or change coverage and control over conflicting policy wording.
• A binder is temporary evidence of coverage until the policy is issued.
• The first named insured on a commercial policy pays premium, receives return premium and cancellation notices, and can cancel (IL 00 17).

Property principles

• Insurable interest must exist at the time of loss, and an insured collects no more than its interest.
• Indemnity: put the insured back where it was, not ahead.
• Direct loss is the physical damage (fire destroys a building). Indirect (consequential) loss follows from it (lost business income during repairs).
• Named perils forms cover only listed perils, and the insured proves a listed peril caused the loss. Open perils forms cover direct physical loss unless excluded, and the insurer proves the exclusion.
• Proximate cause is the cause that starts the unbroken chain of events leading to the loss.

Valuation

• Actual cash value = replacement cost minus depreciation. Equipment costing $10,000 new and 25% depreciated has an ACV of $7,500.
• Replacement cost = repair or replace with like kind and quality, no deduction for depreciation.
• Agreed value sets the value in advance and suspends coinsurance (CP 00 10 optional coverage).
• A valued policy pays the face amount on a total loss; some states have valued policy laws for buildings.

Coinsurance (commercial property)

CP 00 10: (limit carried ÷ (value at time of loss × coinsurance %)) × loss, then subtract the deductible; never more than the limit.

• $250,000 building, 90% coinsurance, $180,000 limit, $45,000 loss: required $225,000; ratio 0.80; payment $36,000 before deductible.
• $400,000 building, 80%, $240,000 limit, $1,000 deductible, $50,000 loss: 0.75 × $50,000 = $37,500 − $1,000 = $36,500.

Homeowners forms work differently: HO 00 03 has no coinsurance clause but pays full replacement cost on the dwelling only if Coverage A is at least 80% of full replacement cost at the time of loss (see the homeowners guide).

Property conditions

• Duties after loss: prompt notice, protect property from further damage, cooperate, and a sworn proof of loss within 60 days of the insurer's request (HO 00 03, CP 00 10).
• Appraisal resolves disputes over the amount of loss: two appraisers and an umpire, any two agree; each side pays its own appraiser and splits the umpire.
• Suit against the insurer under HO 00 03 Section I must start within 2 years after the date of loss.
• No abandonment of property to the insurer; the insurer may keep salvage after paying.
• Pair or set: pay the loss in value of the set, not the whole set.
• Mortgage clause: the lender can collect even when the insured's claim is denied for the insured's acts; HO 00 03 gives the mortgagee at least 10 days' notice of cancellation or nonrenewal.
• Vacancy: CP 00 10 restricts or reduces coverage after 60 consecutive days of vacancy.
• Liberalization: free broadenings apply automatically. Assignment requires the insurer's written consent. No benefit to bailee.
• Other insurance: pro rata ($200,000 and $300,000 policies split a $100,000 loss $40,000 / $60,000), contribution by equal shares ($100,000 and $300,000 policies each pay $75,000 of a $150,000 loss) or excess.
• Subrogation: the insurer that pays may recover from the party at fault.
• Additional coverages such as debris removal and preservation of property supplement the main coverage.

Liability principles

Legal liability comes from torts (civil wrongs), contracts (a hold harmless agreement transfers liability by contract) and statutes. Workers compensation is a statutory no-fault system: the employer owes benefits regardless of fault.

• Negligence = failure to use the care a reasonably prudent person would use. Four elements: duty, breach, proximate cause, damages. Intent is not an element (intent points to an intentional tort).
• Strict (absolute) liability applies without fault: blasting, wild animals, defective products.
• Vicarious liability: one party answers for another, such as an employer for an employee in the scope of employment (respondeat superior).
• Res ipsa loquitur infers negligence when the accident would not normally happen without it and the defendant controlled the cause. Attractive nuisance protects children drawn to a hazard like a pool. A bailee (dry cleaner, repair shop) is responsible for customers' property in its care.

Defenses: contributory negligence bars a plaintiff who is at fault to any degree; comparative negligence reduces recovery by the plaintiff's share of fault (pure comparative: a plaintiff 70% at fault recovers 30%; modified comparative bars recovery at 50% or 51%); assumption of risk; last clear chance. Each state chooses its own negligence rule.

Damages: special (measurable: medical bills, lost wages), general (pain and suffering), punitive (to punish), nominal (token).

Liability policy mechanics

• Split limits (100/300/50 = $100,000 BI per person, $300,000 BI per accident, $50,000 PD). With 250/500/100 limits and awards of $200,000, $300,000 and $150,000, per-person caps give $600,000, but the per-accident cap limits payment to $500,000.
• A combined single limit is one amount for BI and PD together; an aggregate limit caps the policy period.
• The CGL insurer's duty to defend is in addition to limits and ends when the limit is used up paying judgments or settlements.
• Occurrence policies cover injury during the policy period whenever the claim is made; claims-made policies cover claims made during the period (back to a retroactive date).
• Many commercial policies charge a deposit premium subject to audit of actual payroll or sales.
• Under IL 00 17 the insurer must give at least 10 days' notice to cancel for nonpayment and 30 days for other reasons, unless a state endorsement changes it.

Rating and underwriting

• Underwriting selects, classifies and prices applicants to avoid adverse selection.
• Class (manual) rating gives similar insureds one rate; judgment rating relies on the underwriter for unique risks; retrospective rating adjusts the final premium to the insured's own losses during the period.
• Loss ratio = incurred losses (and LAE) ÷ earned premium: $6.5 million ÷ $10 million = 65%.
• If an insurer raises a rate or declines because of a credit-based insurance score, the federal Fair Credit Reporting Act requires an adverse action notice (15 U.S.C. 1681m).

Common traps

• Peril (cause) vs. hazard (condition).
• Insurable interest at the time of loss.
• Coinsurance: deductible comes off after the ratio is applied; homeowners use an 80% replacement cost condition instead.
• Comparative vs. contributory negligence depends on the state.
• The CGL defends outside limits until the limit is exhausted by payments.