Ch4. Property & Casualty Insurance — Fire, Auto, and Marine

Overview of Property & Casualty (P&C) Insurance

P&C Insurance Characteristics:
Governed by the principle of indemnity
Pays only the actual dollar amount of loss (no unjust enrichment)
Typically annual policies, renewed each year

Major P&C Lines:
Homeowners / Fire insurance
Auto insurance
Marine / Ocean cargo insurance
Liability insurance
Accident & Health (A&H)

Insurable Value vs. Policy Limit:
Insurable value: maximum possible loss on the covered property
  (replacement cost or actual cash value)
Policy limit: the maximum dollar amount the insurer will pay
  as agreed in the contract

Homeowners / Fire Insurance

Coverage:
Damage to dwelling and personal property caused by fire.
Includes losses from firefighting efforts.
Optional endorsements: explosion, lightning, windstorm, etc.

Replacement Cost vs. Actual Cash Value (ACV):
Replacement cost: pays the full cost to replace/repair at current prices.
ACV: pays replacement cost minus depreciation.

Commercial Property Insurance:
Business interruption (BI) coverage can be added to compensate
lost income while the business is shut down for repairs.
Larger commercial risks may require manuscript (custom) forms.

Auto Insurance Structure

Mandatory Coverages (most US states):
Bodily Injury Liability (BI): covers injury to others you cause
  (state minimum limits vary — e.g., 25/50 in many states)
Property Damage Liability (PD): covers damage to others' property
  (minimum ~$10,000–$25,000 depending on state)

Optional (but strongly recommended) Coverages:
Uninsured/Underinsured Motorist (UM/UIM): covers you when
  the at-fault driver has no insurance or too little insurance
Medical Payments (MedPay) / PIP: pays your own injury costs
  regardless of fault
Collision: covers damage to your own vehicle from an accident
Comprehensive: covers non-collision losses (theft, hail, fire, etc.)

Premium Factors:
Age, driving record, vehicle type, garaging location,
coverage selections, credit score (permitted in most states)

Marine Insurance

Marine Insurance:
Covers ships, cargo, and other interests against ocean perils —
sinking, storms, piracy, collision.

Hull Insurance:
Covers physical damage to the vessel itself.
Insurable interest: the shipowner.

Cargo Insurance:
Covers goods in transit; essential for import/export trade.
Open cargo policies cover all shipments under one agreement.

Marine Insurance Doctrines:
Particular average: a partial loss borne solely by the party
  whose property was damaged (no sharing).
General average: a deliberate sacrifice made to save the voyage
  (e.g., jettisoning cargo); all cargo owners and the shipowner
  share the cost proportionally.

Key Concept Cards

P&C Insurance = Indemnity Principle ★★★★★ : Recovery is capped at actual loss; no profit from insurance. Memory hook: P&C = make whole, not more

Auto Liability (BI + PD) Is Mandatory ★★★★★ : Most states require minimum bodily injury and property damage liability limits. Memory hook: BI + PD = legally required floor

General Average = Shared Loss ★★★★☆ : When cargo is sacrificed to save the voyage, all parties share the cost. Memory hook: General average = shared sacrifice

Practice Quiz

Q. What is the difference between bodily injury liability and uninsured motorist coverage?

Bodily injury (BI) liability pays for injuries you cause to other people. It is mandatory in most states, subject to state minimum limits; any excess above your policy limits becomes your personal out-of-pocket obligation. Uninsured/Underinsured Motorist (UM/UIM) coverage pays for your own injuries when the at-fault driver carries no insurance or too little. Without UM/UIM, if the other driver is uninsured, you are left with no compensation beyond your own health insurance. Most insurance professionals recommend carrying UM/UIM limits equal to your BI liability limits.

Q. How is the coinsurance (underinsurance) penalty calculated?

The coinsurance formula: Recovery = Loss × (Amount of Insurance / Required Insurance). Under an 80% coinsurance clause: if your building is worth $500,000, you must carry at least$ 400,000 (80%). If you only carry $200,000 and suffer a$ 150,000 loss: Recovery = $150,000 × ($ 200,000 / $400,000) =$ 75,000. The penalty discourages buying a low policy limit to save on premiums while expecting full recovery on partial losses. Carrying coverage equal to full (or replacement-cost) value eliminates the penalty.