What Is Property Insurance?

The word "property insurance" is used to refer to a wide variety of products that protect building owners from financial loss or legal risk. If a building or its contents are damaged or stolen, or if a third party is wounded on the property, the policyholder or lessee will receive compensation from the insurer.

Several types of insurance are included under the umbrella term "property insurance," including protection against natural disasters like floods and earthquakes. Personal belongings are typically covered by a homeowner's or renter's insurance policy. The exception to this rule is high-priced personal property, which is typically protected by adding a "rider" to the policy. In the event of a claim, property insurance will pay out the greater of the item's actual cash worth or its replacement cost.

An Explanation of How Homeowner's Insurance Operates

Fire, smoke, wind, hail, the weight of snow and ice, lightning, and other specific weather-related perils are among those commonly covered by property insurance. Vandalism, theft, and other perils are all covered by property insurance. Suppose someone besides the owner or lessee of the property is hurt on the property and decides to sue. In that case, the liability coverage provided by property insurance will help pay for their medical bills and other associated costs.

Property insurance plans typically do not cover tsunamis, floods, drain and sewer backups, leaking groundwater, standing water, and a host of other water sources. Insurance typically does not cover damage caused by mold or earthquakes. In addition, nuclear disasters, wars, and terrorist attacks are typically not covered by standard insurance policies.

Realizing the Value of Property Coverage

Coverage options for property insurance include replacement cost, real cash value, and extended replacement cost.

The replacement cost clause includes the cost of restoring or replacing an item to its pre-damage condition. Values are covered at their replacement cost rather than their current market value.

The policyholder or lessee receives the replacement cost minus depreciation from actual cash value coverage. If the item was ten years old when it was destroyed, you would receive the value of a ten-year-old version of the same item rather than a brand-new one.

If building costs have increased, the extended replacement cost provision will pay for the extra amount. It's usually up to a maximum of 25% of the coverage limit. The limit is the maximum payout the company will pay out in the event of a covered loss.