Proximate Cause is an act or event considered a natural and reasonably foreseeable cause of the damage that occurs. Also referred to as direct liability.
A driver runs a red light and hits another car. The impact pushes that car into a pedestrian.
The driver running the red light is the proximate cause of both the car damage AND the pedestrian's injuries because there's an unbroken chain of events from the negligent act to both injuries.
The Setup:
A homeowner leaves a garden hose running overnight by mistake. The water floods the neighbor's basement.
The Chain of Events:
The Result:
Leaving the hose on was the proximate cause of the basement damage. There's an unbroken chain from the negligent act (leaving the hose on) to the injury (flooded basement). The homeowner's liability insurance would cover this because the damage was a natural and foreseeable result of the negligence.
A deductible is a dollar amount the insured must pay on a claim before the insurance policy provides coverage.
Higher Deductible = Lower Premium
Total Loss
$5,000
Your Deductible
- $500
Insurance Pays
= $4,500
Why Deductibles Exist:
The coinsurance clause states that, in consideration of a reduced rate, the insured agrees to maintain a minimum amount of insurance on the property.
Most losses are partial, not total. Without coinsurance, people might only insure their property for a fraction of its value, pay lower premiums, and still be fully covered for partial losses. Coinsurance encourages proper coverage.
(Insurance Carried ÷ Insurance Required) × Loss Amount = Loss Payment
Given:
Calculation:
($40,000 ÷ $80,000) × $10,000 = $5,000
Result:
The insured only receives $5,000 for a $10,000 loss! They must pay the other $5,000 out of pocket (plus any deductible) because they didn't carry enough insurance.
The Setup:
ABC Manufacturing owns a warehouse worth $500,000. Their policy has an 80% coinsurance clause. To avoid a coinsurance penalty, they should carry at least $400,000 in coverage ($500,000 x 80%). However, to save money on premiums, they only purchased $300,000 in coverage.
What Happens:
A fire causes $80,000 in damage to the warehouse (partial loss).
With Underinsurance ($300K):
($300,000 / $400,000) x $80,000
= 0.75 x $80,000
= $60,000 paid
ABC pays $20,000 out of pocket!
If Properly Insured ($400K):
($400,000 / $400,000) x $80,000
= 1.00 x $80,000
= $80,000 paid (full loss!)
ABC pays $0 out of pocket
The Lesson: The premium savings from buying $300K instead of $400K coverage was probably $500-1000/year. But when the fire hit, that "savings" cost ABC $20,000! Coinsurance rewards adequate insurance and punishes underinsurance.
Coinsurance penalty applies if insured is underinsured. Paid in full if minimum is met.
Coinsurance clause does NOT operate. Face amount of policy is paid.
Usually found in homeowners policies. Provides replacement cost settlement to policyholders who carry adequate insurance (exact dollar amount or percentage of value).
If insurance is less than required, the insured would still be indemnified at least to the actual cash value of the loss.
Deposit Premium
Estimated premium paid in advance before the policy is issued
Deposit Premium Audit
Insurer may audit insured's books and records to determine if adequate premium was collected
Written evidence showing the insurance policy has been issued. Lists the amounts and types of insurance provided.
Common Use: Contractors often need to provide a certificate of insurance to prove they have liability coverage before starting work.
Proximate Cause
Natural, foreseeable cause - unbroken chain of events
Deductible
Amount insured pays before coverage kicks in
Higher Deductible
= Lower Premium
Coinsurance
Minimum insurance requirement
Coinsurance Formula
(Carried ÷ Required) × Loss
Total Loss
Coinsurance doesn't apply