Property insurance pays when something you own is damaged, destroyed or stolen. Homeowners, dwelling, commercial property and inland marine policies all rest on the same handful of ideas: insurable interest, indemnity, how a loss is valued, what causes of loss are covered, and the conditions both sides must follow after a loss. This guide covers those building blocks. Form references are to the ISO homeowners form (HO 00 03 05 11), the ISO Building and Personal Property form (CP 00 10 10 12) and the ISO commercial conditions (CP 00 90, IL 00 17). Insurers and states can amend these forms, so the figures below are what the ISO forms say.

Insurable interest and indemnity

Insurable interest means you would suffer a real financial loss if the property were damaged. Owners, mortgage lenders, tenants who made improvements, and businesses holding customers' goods all have one. In property insurance the interest must exist at the time of the loss, and you collect only to the extent of your interest. (In life insurance it is tested when the policy is issued instead.)

Indemnity means the insurer restores you to about the same financial position you were in before the loss, no better. Deductibles, limits, valuation rules, "other insurance" clauses and subrogation all exist to keep a claim from turning into a profit.

Direct and indirect loss

• A direct loss is physical damage caused by a peril: smoke damage to a kitchen after a grease fire.
• An indirect (consequential) loss is the financial loss that follows: lost business income or extra living expense while the kitchen is rebuilt. Coverages for these are called time element coverages (business income, extra expense, loss of use).

How losses are valued

• ACV example: a roof that would cost $20,000 new and is 40% depreciated has an ACV of $12,000. A sofa with a $2,000 replacement cost, a 10-year life and 4 years of age is 40% depreciated, so its ACV is $1,200.
• Replacement cost forms usually pay ACV first and release the withheld ("recoverable") depreciation once the property is actually repaired or replaced. Under CP 00 10 you may take ACV first and still claim the replacement cost difference if you notify the insurer within 180 days after the loss.
• A valued policy pays the stated amount for a total loss regardless of actual value; it is used for things like fine art. Some states also have valued policy laws that require payment of the full face amount when a building is totally destroyed by certain perils (for example Fla. Stat. 627.702). Not every state has one.
• Agreed value (an optional coverage in CP 00 10) suspends the coinsurance condition for the period shown in the declarations.

Coinsurance

Commercial property forms use a coinsurance clause to make insureds carry limits close to the property's full value (80%, 90% and 100% are typical percentages). Value is measured at the time of the loss, so rising building costs can create a penalty mid-term; the inflation guard option raises the limit automatically by a set annual percentage.

CP 00 10 works in four steps:

1. Value at time of loss × coinsurance % = amount required.
2. Limit carried ÷ amount required = ratio.
3. Ratio × total loss (before the deductible).
4. Subtract the deductible. The insurer pays that figure or the limit, whichever is less.

Example: a $300,000 building, 80% coinsurance, $180,000 limit, $500 deductible, $40,000 loss. Required = $240,000; $180,000 ÷ $240,000 = 0.75; 0.75 × $40,000 = $30,000; minus $500 = $29,500. Had the insured carried $240,000 or more, the insurer would pay $39,500.

Coinsurance never lets the payment exceed the limit: a $500,000 building insured for $200,000 with 80% coinsurance that burns to the ground gets $200,000, not the $250,000 the ratio would produce.

Deductibles and limits

• A deductible is the part of each loss the insured keeps: a $6,500 loss with a $1,000 deductible pays $5,500. Higher deductibles mean lower premiums.
• Some deductibles are a percentage of the insured value rather than a flat amount; the ISO homeowners earthquake endorsement (HO 04 54) is an example.
• A sublimit caps one category of property inside the overall limit (money, jewelry theft, firearms).
• Blanket insurance puts one limit over several items or locations; specific insurance puts a separate limit on each.
• Paying a partial loss generally does not reduce the limit available for later losses during the term.

Covered causes of loss

A peril is a cause of loss; a hazard is a condition that makes a loss more likely or more severe.

• Named-perils forms cover only the perils listed. The insured must show a listed peril caused the loss.
• Open-perils ("special" or "all risks") forms cover direct physical loss unless an exclusion applies. The insurer must show the exclusion applies. Open perils is broader.
• Proximate cause is the cause that starts an unbroken chain of events. Lightning splits a tree, the tree falls through the roof, rain ruins the furniture: lightning is the proximate cause.
• Concurrent causation is a loss with two causes, one covered and one excluded. ISO forms answer it with anti-concurrent causation wording: certain excluded perils (flood, earth movement, ordinance or law and others) exclude the loss "regardless of any other cause or event contributing concurrently or in any sequence."
• Ensuing loss wording gives back coverage when an excluded event leads to a covered one, such as fire following an earthquake.
• Theft is any act of stealing. Burglary involves breaking into premises; robbery is taking property from a person by violence or the threat of it. Mysterious disappearance is property that vanishes with no known cause.

Standard exclusions you will see everywhere: flood (bought through the NFIP or a private flood policy), earth movement, ordinance or law (the extra cost of meeting current building codes, unless endorsed), wear and tear, inherent vice (property that destroys itself, like fruit rotting), war and nuclear hazard.

Vacancy

• HO 00 03: vandalism and malicious mischief, and glass breakage on the residence premises, are not covered if the dwelling has been vacant for more than 60 consecutive days before the loss. A dwelling under construction is not vacant.
• CP 00 10: an owner's building is vacant unless at least 31% of its square footage is rented or used for customary operations. After more than 60 consecutive days of vacancy there is no coverage for vandalism, sprinkler leakage (unless protected from freezing), building glass breakage, water damage, theft or attempted theft, and other covered losses are reduced by 15%.
• Unoccupied (no one living there, furniture still in place) is not the same as vacant (empty).

Conditions you must know

• Duties after loss: prompt notice, protect the property from further damage, inventory, show the damaged property, and send a signed, sworn proof of loss within 60 days after the insurer asks (HO 00 03 and CP 00 10).
• Appraisal settles disputes over the amount of loss, not whether there is coverage. Under HO 00 03 each side picks an appraiser within 20 days of a written demand; the appraisers pick an umpire; agreement of any two sets the amount. Each side pays its own appraiser and they split the umpire's cost.
• Suit against us: HO 00 03 and the CP conditions require a suit to start within 2 years after the date of loss (state amendatory endorsements may change this).
• Abandonment: the insured cannot abandon property to the insurer. Salvage: after paying for property, the insurer may take it and sell what is left.
• Pair or set: the insurer pays the drop in value of the set. Earrings worth $3,000 as a pair, one stolen, the other worth $500 alone: the insurer pays $2,500.
• Mortgage clause: the lender is paid as its interest appears and keeps its rights even if the insured's claim is denied, provided it pays premium on demand, reports known changes in risk and files its own proof of loss within 60 days of notice. HO 00 03 requires at least 10 days' notice to the mortgagee of cancellation or nonrenewal; CP 00 10 requires 10 days for nonpayment and 30 days for other reasons. A loss payable clause protects a creditor's interest in personal property.
• Other insurance: pro rata (each policy pays its share of total insurance: a $100,000 policy and a $300,000 policy split a $40,000 loss $10,000 / $30,000), contribution by equal shares, and excess (pays only after primary limits are used).
• Subrogation: after paying, the insurer takes over the insured's right to recover from the person who caused the loss. The ISO commercial property and businessowners conditions let the insured waive that right in writing before a loss; after a loss the waiver is allowed only for certain related parties (someone insured, an affiliated business, a tenant). Releasing the wrongdoer after a loss can cost you coverage.
• Liberalization: a broadening the insurer adopts without extra premium applies automatically; HO 00 03 applies it if adopted within 60 days before or during the policy period.
• Concealment or fraud by the insured voids coverage.
• Assignment of the policy needs the insurer's written consent. No benefit to bailee: a warehouse or other bailee holding your property for a fee cannot use your insurance.

Cancellation and premium

• Unearned premium is the part that applies to the unexpired term. An insurer cancelling a $900 annual policy after 3 months returns 9/12 × $900 = $675 (pro rata).
• Under the commercial Common Policy Conditions (IL 00 17), the insurer's cancellation refunds pro rata; if the first named insured cancels, the refund may be less than pro rata (short rate). HO 00 03 refunds pro rata either way.
• A flat cancellation is effective at inception, with full premium returned.
• The first named insured pays premium and receives notices for everyone insured under a commercial policy.
• Notice periods for cancellation and nonrenewal are set by each policy and by state law, which often requires longer periods than the base forms.

Common traps

• Insurable interest for property must exist when the loss happens.
• Coinsurance compares the limit carried to the limit required at loss time, never to the amount of the loss; the deductible comes off last.
• Open perils = insurer proves an exclusion; named perils = insured proves a listed peril.
• Appraisal decides how much, not whether.
• Valued policy laws exist only in some states.
• Vacant is not the same as unoccupied, and the vacancy rules differ between homeowners and commercial forms.