University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

81

Pages:

2
Author:

bratrochanter

This section provides insights into property insurance, covering essential elements such as the insurable interest requirement, typical covered and excluded perils, and specialized insurance policies for both real and personal property. Key Concepts: 1. Insurable Interest Requirement: o An insurable interest exists if the policyholder has a legal or financial stake in the property and would suffer economic loss if it were damaged. This requirement distinguishes valid insurance from illegal wagering contracts. For example, legal owners, mortgage holders, and lienholders all have insurable interests. o The insurable interest must exist at the time of loss. If the policyholder has sold or transferred the property by the time it is damaged, they cannot claim under the insurance. 2. Extent of Insurable Interest: o Recovery is limited to the policyholder’s financial interest. For instance, a lender insuring a property can only recover up to the outstanding loan amount if the property is damaged, regardless of the insurance coverage limit. 3. Covered and Excluded Perils: o Property insurance policies typically cover perils like fire, lightning, hail, wind, and certain impacts (e.g., from vehicles or aircraft). Fire insurance, for example, includes accidental fires but excludes arson or intentional harm caused by the insured. Coverage often extends to indirect damage from smoke or firefighters’ actions. o Excluded perils commonly include flood, earthquake, and war-related damage. Flood damage, while excluded in standard property policies, can sometimes be added with a specialized policy or an extra premium. 4. Personal Property Insurance: o Coverage is also available for personal property, often included in homeowner’s policies, which protect not only the dwelling but also belongings within or near the property. Renters may also purchase insurance specifically covering their personal property on leased premises. o Automobile insurance partially serves as personal property insurance, covering vehicle damage from events like fire, vandalism, or collisions. 5. Specialized Insurance for Additional Coverage: o Property owners may acquire additional insurance policies for specific excluded perils, such as flood or earthquake insurance, or add riders to existing policies to include these risks. Case Study: Shelter Mutual Insurance Co. v. Maples  The Maples case, referenced here, highlights the importance of explicit policy terms regarding coverage and exclusions. Maples’ experience underscores the necessity of reviewing insurance policies for precise language on covered and excluded perils, especially for homeowners who might encounter varying interpretations based on jurisdiction and policy specifics. Summary: Property insurance is a critical risk management tool for real estate and personal belongings, allowing property owners to mitigate financial losses from specific perils. The insurable interest requirement ensures that only parties with a genuine financial stake can benefit from the insurance, while detailed policy terms clarify covered events and limitations.