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INS 203

Principles and Practices of General Insurance

TU BBA-F · Semester 8 · BBA-F curriculum (2021 Common Core)

Requirement
elective
Credits
3
Study Guide
7 units available

Chapter notes

Authoritative study guide across 7 syllabus units

Open a unit to read its study notes.

Unit 1: Property Insurance· 7 LHs· ~9 marks

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Property Insurance

Property Loss Settlement Ladder
Property Loss Settlement Ladder

Fire and Property Insurance Foundations: Perils, Warranties, and Standard Policies

Actual Cash Value (ACV) vs Replacement Cost

  • Actual Cash Value (ACV): Replacement cost of damaged property minus accumulated physical depreciation, wear, and tear:
    ACV=Current Replacement Cost−Depreciation\text{ACV} = \text{Current Replacement Cost} - \text{Depreciation}
  • Replacement Cost: The cost to repair or replace the damaged asset with new material of like kind and quality, with zero deduction for depreciation.

Named Perils vs Open Perils (All-Risks)

  • Named Perils: Covers only those specific perils explicitly listed in the policy bond (e.g., fire, lightning, explosion); burden of proof rests on the insured.
  • Open Perils: Covers all accidental causes of direct physical loss except those perils explicitly excluded; burden of proof rests on the insurer.

Coinsurance Clause in Property Insurance

Claim Paid=Amount of Insurance CarriedAmount of Insurance Required (e.g., 80% of Value)×Actual Loss−Deductible\text{Claim Paid} = \frac{\text{Amount of Insurance Carried}}{\text{Amount of Insurance Required (e.g., 80\% of Value)}} \times \text{Actual Loss} - \text{Deductible}

Loss Valuation: Actual Cash Value vs Replacement Cost and Average Clauses

Property Loss Settlement Ladder

Structural Elements of a Commercial Property Policy

  1. Declarations Page: Insured identity, property location, sum insured, premium, policy term.
  2. Insuring Agreement: Core contractual promise to indemnify against physical loss.
  3. Conditions: Notice of loss, proof of loss submission within statutory days, salvage preservation.
  4. Exclusions: Inherent vice, wear and tear, war, nuclear contamination, illegal commercial activities.
  5. Endorsements / Add-On Covers: Earthquake, flood, landslide, terrorism, and business interruption (loss of profits) riders.

Comparative Settlement Methods: Actual Cash Value vs Replacement Cost Insurance

Dimension Actual Cash Value (ACV) Policy Replacement Cost Policy
Depreciation Deduction Strictly deducted based on age/wear Zero depreciation deducted
Premium Cost Lower premium Higher premium (15%−25%15\% - 25\% loading)
Indemnity Principle Pure traditional indemnity Contractual relaxation of strict indemnity
Rebuilding Obligation Cash disbursed without rebuild proof Must physically repair/replace to claim full cost

Pro-Rata Average Clause Loss Settlement and Salvage Deductions

Applied Problem: Coinsurance and Replacement Cost Calculation

A commercial building has an insurable replacement value of Rs. 10,000,000.

  • The property policy contains an 80%80\% Coinsurance Clause.
  • The owner carries a Sum Insured of Rs. 6,000,000.
  • A fire causes an actual physical damage of Rs. 2,000,000.
  • Policy deductible is Rs. 50,000.
  1. Determine the required insurance amount.
  2. Calculate the net claim payable to the building owner.
  3. How much of the loss must the owner bear personally?

Solution:

  1. Required Insurance Coverage:
    Required Coverage=10,000,000×0.80=Rs. 8,000,000\text{Required Coverage} = 10,000,000 \times 0.80 = \text{Rs. } 8,000,000
  2. Claim Payable under Coinsurance Formula:
    Gross Claim=CarriedRequired×Loss=6,000,0008,000,000×2,000,000=0.75×2,000,000=Rs. 1,500,000\text{Gross Claim} = \frac{\text{Carried}}{\text{Required}} \times \text{Loss} = \frac{6,000,000}{8,000,000} \times 2,000,000 = 0.75 \times 2,000,000 = \text{Rs. } 1,500,000
    Net Claim Payable=Gross Claim−Deductible=1,500,000−50,000=Rs. 1,450,000\text{Net Claim Payable} = \text{Gross Claim} - \text{Deductible} = 1,500,000 - 50,000 = \text{Rs. } 1,450,000
  3. Loss Borne by Insured:
    Owner Share=Actual Loss (2,000,000)−Net Claim (1,450,000)=Rs. 550,000\text{Owner Share} = \text{Actual Loss (2,000,000)} - \text{Net Claim (1,450,000)} = \text{Rs. } 550,000
    (Comprises Rs. 500,000 under-insurance coinsurance penalty plus Rs. 50,000 deductible).

Key analytical nuance: they apply the 80% coinsurance percentage to the actual loss rather than to the property replacement value.

Coinsurance Formula and Property Valuation Methods

In property insurance, insurers penalize intentional underinsurance via the statutory coinsurance clause:

Claim Payment=(Amount of Insurance CarriedAmount of Insurance Required)×Loss−Deductible\text{Claim Payment} = \left( \frac{\text{Amount of Insurance Carried}}{\text{Amount of Insurance Required}} \right) \times \text{Loss} - \text{Deductible}
Where Insurance Required=Coinsurance %×Replacement Value of Property\text{Insurance Required} = \text{Coinsurance \%} \times \text{Replacement Value of Property}.

  • Actual Cash Value (ACV) vs. Replacement Cost:
    ACV=Replacement Cost New−Accrued Physical Depreciation\text{ACV} = \text{Replacement Cost New} - \text{Accrued Physical Depreciation}
    Replacement cost coverage pays the full cost to repair or rebuild damaged property with like kind and quality without deduction for physical wear and tear.