Exam 17: Personal Property: Bailment and Insurance

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First,as a matter of risk management,it is critically important to understand the scope of coverage that is provided by an insurance policy.Not surprisingly,you only get what you pay for.Most insurance contracts are based on standard form agreements that cover common events,like fires,floods,storms,and thefts.That basic coverage,however,is subject to various restrictions.Standard fire insurance,for instance,may not cover accidents that arise from the storage of explosives or from riots.As a general rule,you can obtain extra protection for those events,but you will have to pay higher premiums.
Property insurance merely provides indemnification,in the sense that it is aimed at reimbursing the insured for a loss that has occurred.Very often,however,the benefit that the insured receives under a policy is insufficient to replace lost or damaged property with new replacements.This is True for several reasons. 
- First,most insurance contracts are based on standard form agreements that cover common events,like fires,floods,storms,and thefts.This basic coverage is subject to various restrictions.Standard fire insurance,for instance,may not cover accidents that arise from the storage of explosives or from riots.As a general rule,extra protection can be purchased with respect to those events,but only at an additional price.Consequently,even if a widget is subject to property insurance,the insured may not be entitled to receive any benefit if the loss does not fall within the scope of the policy. 
- Second,there are different ways of calculating the loss that occurs when property is lost,damaged,or destroyed.If a piece of equipment is badly damaged in a fire,a policy may entitle the insured to replace it with a new machine.It is more likely,however,that the insurance company is only obligated to pay an amount equal to the value of the equipment the moment before it was destroyed.And if that equipment had been in use for some time before the accident,its depreciated value would probably be far less than the cost of a replacement.Consequently,unless the insured can find a suitable second-hand substitute,the policy will not actually provide enough money to purchase a substitute.And it almost certainly will not provide the insured with enough money to buy a new replacement.
- Finally,property insurance policies usually include deductibles.A deductible occurs when the insurer is not required to provide indemnification for the initial part of a loss.A common example arises in connection with cracked automobile windshields.The driver usually agrees to pay the first $250 towards a repair.Of course,the insured can always ask for a policy that does not have a deductible and that provides full replacement cost.But again,it will pay accordingly.