The amount payable depends on policy provisions in the following categories: -
· Policy limits
· Valuation provisions
· Settlement options
· Deductibles
· Insurance-to-value provisions
· “Other insurance” provisions
Policy limits
When buying property insurance, the applicant usually requests a certain dollar amount of coverage. If the insurer agrees to provide that amount of coverage, the policy limit is established and the same is entered into the policy.
It is the maximum amount of money that can be recovered under a policy. It also enables insured to know whether his property is adequately covered or whether there is any under insurance.
On the other hand, it shows insurer the maximum amount he has to pay in the event of a claim under the policy. This enables insurance companies to keep a track of their operation effectiveness in a given geographical area.
For most property insurance, the premium charged is directly related to the policy limit.
Valuation Provisions
The two most common valuation approaches in property insurance policies are replacement cost and actual cash value. A third approach, used for certain types of property, involves agreed value.
Settlement Options
The insurer generally has the option of:
· Paying the value (as determined by the valuation provision) of the lost or damaged property.
· Paying the cost to repair or replace the property (if repair or replacement is possible)
· Repairing, rebuilding, or replacing the property with other property of like kind and quality.
These options for settling property losses can often reduce the insurer’s cost of settling claims without diminishing the insured’s actual indemnification.
Deductibles
A deductible is a portion of covered loss that is not paid by the insurer. The deductible is subtracted from the amount the insurer would otherwise be obligated to pay the insured.
Deductibles encourage insured to try to prevent losses. Shifting the cost of small claims to the insured also enables the insurer to reduce premiums. Handling claims for small amounts often costs more than the dollar amount of the claim. Thus, deductibles enable people to purchase coverage for serious losses at a reasonable price without unnecessarily involving the insurer in small losses.
Insurance-to-Value Provisions
These are provisions in property insurance policies that encourage insureds to purchase an amount of insurance that is equal to, or close to, the value of the covered property.
Few losses are total. Unless all insureds purchase an amount of insurance close to the full value of their property, some insureds will pay considerably less for what provides, in most cases, the same recovery for a loss.
The traditional approach to encouraging insurance to value is to include a coinsurance provision in the policy. Coinsurance is an insurance-to-value provision in many property insurance policies. If the property is underinsured, the coinsurance provision reduces the amount that an insurer will pay for a covered loss.
“Other Insurance” Provisions
In cases, where more than one insurance policy exists covering the same property, “Other Insurance” provision in a policy will prevent insured from profiting out of a claim from all the policies covering the property.
Property Loss Exposures
