Property and Casualty Insurance Practice Exam

What occurs if recovered property is retained by the insured?

1. The full value of the property is paid out as a loss

2. The property value is deducted from the loss claim settlement

3. No deduction occurs, and the claim is paid in full

4. The insurer takes possession of the recovered property

The correct answer is: The property value is deducted from the loss claim settlement

When an insured retains recovered property after a loss has occurred, it typically leads to a deduction of the value of that property from the loss claim settlement. This principle is rooted in the concept of indemnity, which ensures that the insured is not profiting from the insurance claim but rather is restored to their financial position prior to the loss. If the insured keeps the recovered property, the insurer has effectively lessened its liability by the amount of the property's value. This reflects a fair approach to claims, as the insured's loss is reduced by what is essentially a partial recovery. The adjustment in settlement ensures the insured is compensated appropriately without enriching themselves from both the claim and the retained property. In contrast, paying out the full value of the property without any adjustment would go against the principles of indemnity. Similarly, if no deductions were made, it could result in the insured receiving more than their actual loss, which could lead to potential moral hazard. The insurer taking possession of the recovered property is another process but would typically require that recovery follows after a loss settlement is agreed upon. Thus, retaining the property leads to the correct process of adjusting the claim accordingly.