Analysis and Evaluation of Risk Exposure - Property Risk and Insurance

Property signifies dominion or right of use, control, and disposition which one may lawfully exercise over things, objects, or land. The purpose of property insurance is to protect against the theft and destruction of personal property. In the case of catastrophes like fire, explosion, theft, or vandalism, property insurance helps cover your costs - whether it's to repair damaged property or replace what you've lost. For insurance purposes, when you think of property it comes in three forms- real, personal, and auto.

One of the basic dividing lines between property is that between real property and personal property. Generally, the term real property refers to land. Land, in its general usage, includes not only the face of the earth but everything of a permanent nature over or under it. This includes natural structures and minerals located on or beneath the land structure. Besides obtaining an umbrella liability policy, raw land is typically uninsurable. Homeowner's can and should look into purchasing a flood or erosion insurance policy if their home is located in a county deemed flood zone or a state that may experience heavy rains or hurricanes.

The two most common types of personal property insurance policies are homeowner's and renter's insurance policies. Named-peril policies list only the kinds of risk that are covered; the problem here is that policyholders may not realize what's missing until then try to file a claim. They may discover, for example, that they are insured for theft but not for damage due to vandalism. A property insurance policy is not a maintenance contract, it is meant to cover sudden and accidental losses, not loss associated with the lack of proper maintenance of a property.

There are three methods of settling a loss, they include:

Guaranteed Replacement Cost- These policies are the best and most expensive to own. They generally pay whatever it costs to rebuild or replace your home or property exactly as it was before the fire or other catastrophe.
Replacement Cost- These are policies that will pay to repair or replace property with materials of similar quality. If a storm tears off your 5-year-old roof, a replacement cost policy will pay for a new roof.
Cash Value Policies- These policies will pay only the cash value of the property at the time of the claim, which can be considerably less than the cost of having it fixed. For example- If your 10-year old television is stolen, the insurance company will take into consideration the depreciation on the television for the last ten years and only pay cash for the current market value of the old TV.

Practice Question:
Which of the following statements is incorrect regarding homeowners policies?

A. The insurance company must provide notice if the policy is not going to be renewed
B. The insurance company can elect to repair or replace property instead of paying cash
C. The policy covers the insured's interest in the property
D. The insured can assign the policy without written consent from the insurance company

Answer: D
Because homeowner policies are considered personal contracts, the insured does not have the right to assign the policy to another without the written consent of the insurance company.

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