Property Insurance – P&C License Exam Study Guide
Overview
Property insurance covers losses to real and personal property caused by various perils, and is a core component of the Property & Casualty licensing exam. This guide covers valuation methods, coinsurance calculations, policy structures, homeowners forms, exclusions, and additional coverages. Mastering these concepts—especially the math-based coinsurance formula—is essential for exam success.
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Valuation Methods
Summary
Valuation determines how much the insurer pays when a covered loss occurs. The method used is defined in the policy and directly impacts the settlement amount. Understanding the differences between methods is critical for both the exam and real-world application.
Key Concepts
Key Terms
Watch Out For
> ⚠️ Stated Amount ≠ Guaranteed Payment. Many students confuse Stated Amount with Agreed Value. Under Stated Amount, the insurer pays the lesser of three options—the stated amount is only a cap, not a guarantee.
> ⚠️ ACV is the default—not RCV. Unless an insured purchases a replacement cost endorsement, standard homeowners policies pay ACV, meaning depreciation will be deducted.
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Coinsurance
Summary
Coinsurance clauses in commercial property policies incentivize insureds to carry adequate coverage relative to the property's full value. Failing to meet the required insurance-to-value ratio results in a penalty at the time of loss, making the insured a "co-insurer" for the shortfall.
The Coinsurance Formula
$$\frac{\text{Insurance Carried}}{\text{Insurance Required}} \times \text{Loss Amount} = \text{Amount Paid}$$
Worked Example
| Variable | Value |
|---|---|
| Building Value | $500,000 |
| Coinsurance Requirement | 80% |
| Insurance Required | $400,000 |
| Insurance Carried | $300,000 |
| Loss Amount | $100,000 |
Calculation: ($300,000 ÷ $400,000) × $100,000 = $75,000 paid
The insured bears the remaining $25,000 as a penalty for being underinsured.
Additional Coinsurance Rules
Key Terms
Watch Out For
> ⚠️ The deductible is separate from the coinsurance formula. Exam questions often say "ignoring the deductible"—make sure you apply the formula correctly before subtracting any deductible.
> ⚠️ Agreed Value suspends coinsurance—Stated Amount does not. Agreed Value eliminates the coinsurance penalty; Stated Amount does not have this effect.
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Policy Types & Structure
Summary
Property policies are defined by what perils they cover and how they assign limits. The cause-of-loss form selected determines coverage breadth, and whether a policy is blanket or specific determines how limits are applied across locations or items.
Cause-of-Loss Forms (Most → Least Restrictive)
| Form | Type | Coverage |
|---|---|---|
| Basic Form | Named Perils | Fire, lightning, explosion, windstorm/hail, smoke, aircraft/vehicles, riot, vandalism, sprinkler leakage, sinkhole collapse, volcanic action |
| Broad Form | Named Perils | All Basic perils + falling objects, weight of snow/ice/sleet, accidental water discharge |
| Special Form | Open Perils | All causes of loss except those specifically excluded |
Named Perils vs. Open Perils
Blanket vs. Specific Policies
Key Terms
Watch Out For
> ⚠️ Burden of proof shifts based on policy type. Under named perils, the insured must prove the peril is listed. Under open perils, the insurer must prove an exclusion applies. This distinction is a frequent exam question.
> ⚠️ Basic Form does NOT include water damage or falling objects—those are added with the Broad Form.
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Homeowners & Dwelling Policies
Summary
Homeowners policies are package policies combining property and liability coverage. Each form (HO-2 through HO-8) is tailored to a specific type of insured or dwelling. The HO-3 is the most commonly tested form.
Homeowners Forms Comparison
| Form | Name | Dwelling Coverage | Personal Property |
|---|---|---|---|
| HO-2 | Broad Form | Named Perils | Named Perils |
| HO-3 | Special Form (most common) | Open Perils | Named Perils |
| HO-5 | Comprehensive Form (broadest) | Open Perils | Open Perils |
| HO-6 | Unit-Owners (Condo) | Named Perils (interior) | Named Perils |
| HO-8 | Modified Coverage | ACV/Common Materials | Named Perils |
HO-3 Coverage Parts
| Coverage | What It Covers | Default Limit |
|---|---|---|
| Coverage A | Dwelling | Policy limit (set by insured) |
| Coverage B | Other Structures (detached garages, fences) | 10% of Coverage A |
| Coverage C | Personal Property | Typically 50–70% of Coverage A |
| Coverage D | Loss of Use / Additional Living Expenses (ALE) | Typically 20–30% of Coverage A |
Special Notes on Key Forms
Key Terms
Watch Out For
> ⚠️ HO-3 is NOT open perils for personal property. The dwelling (Coverage A) is open perils, but personal property (Coverage C) is named perils only. HO-5 is required for open perils on personal property.
> ⚠️ Coverage B is a percentage of Coverage A, not a flat dollar amount. A $300,000 dwelling automatically provides $30,000 for other structures.
> ⚠️ HO-8 is not for luxury homes—it's for older homes where ACV and market value are appropriate settlement methods due to the cost-prohibitive nature of exact reconstruction.
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Key Exclusions & Limitations
Summary
Standard property policies contain critical exclusions that are heavily tested. Knowing what is not covered—and how to fill those gaps—is just as important as knowing what is covered.
Major Standard Exclusions
| Exclusion | What It Excludes | How to Add Coverage |
|---|---|---|
| Flood | Rising water, storm surge, flooding | Separate NFIP policy or private flood policy |
| Earthquake / Earth Movement | Earthquake, landslide, mudslide, subsidence | Separate earthquake policy or endorsement |
| Ordinance or Law | Increased costs to rebuild to current building codes | Ordinance or Law endorsement |
| Concurrent Causation | Losses from combined covered + excluded causes | Anti-concurrent causation language in policy |
Earth Movement Exclusion
Excludes losses from:
Ordinance or Law Exclusion
When a partial loss requires rebuilding to current code, the extra cost to comply is excluded unless the endorsement is purchased. This is especially relevant for older buildings subject to updated building codes.
Concurrent Causation Doctrine
Personal Property Sublimits (Homeowners)
| Property Type | Standard Theft Sublimit |
|---|---|
| Jewelry, Watches, Furs | $1,500 |
| Firearms | $2,500 |
| Silverware | Typically $2,500 |
| Money/Currency | Typically $200 |
Higher limits require a Scheduled Personal Articles Floater or endorsement.
Key Terms
Watch Out For
> ⚠️ Flood and earthquake are NEVER covered under a standard homeowners policy. These are among the most common exam traps. A separate policy is always required.
> ⚠️ The $1,500 jewelry theft sublimit is not a deductible—it's a cap. Even with a $0 deductible and a $10,000 theft, the policy only pays $1,500 for jewelry without a floater.
> ⚠️ Earth movement exclusion applies regardless of cause—even human activity (such as mining or construction) triggering subsidence is excluded.
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Additional Coverages & Endorsements
Summary
Beyond the base policy, additional coverages and endorsements expand protection for specialized needs. These are frequently tested as "gap fillers" for situations where standard policies fall short.
Key Additional Coverages
Debris Removal
Preservation of Property
Business Income (Business Interruption)
Key Endorsements & Specialty Policies
Personal Articles Floater (PAF)
Inland Marine
Subrogation
Key Terms
Watch Out For
> ⚠️ Subrogation requires the insurer to pay the claim first. The right of subrogation arises after the insurer has paid. The insured cannot waive subrogation rights after a loss without the insurer's consent.
> ⚠️ Inland Marine is NOT ocean marine. Inland Marine covers goods on land and in domestic transit. Ocean Marine covers international shipping and vessels.
> ⚠️ A PAF replaces the sublimits in a homeowners policy for scheduled items—it doesn't just add coverage on top. Once an item is scheduled, it's covered under the floater terms, not the HO policy terms.
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Quick Review Checklist
Use this checklist before your exam to confirm you can confidently answer questions on each topic: