State Farm Insurance License Practice Exam

What does 'Inherent Vice' refer to in property insurance?

1. Characteristic leading to market value increase

2. Characteristic in property causing depreciation or spoilage

3. Legal obligation of the insurer

4. Physical damage due to external factors

The correct answer is: Characteristic in property causing depreciation or spoilage

Inherent Vice in the context of property insurance refers to a characteristic of an item that causes it to be prone to depreciation or spoilage, regardless of external conditions. This concept acknowledges that certain properties have natural flaws or traits that make them vulnerable to damage or a rapid decrease in value. For example, items like perishable goods have an inherent vice due to their natural tendency to spoil over time, irrespective of how well they are stored. This means that even if protective measures are in place, the fundamental nature of the item will lead to deterioration. In property insurance, inherent vice is significant because it can limit an insurer's liability; if damage occurs due to an inherent vice, coverage may not apply, as it suggests that the loss was inevitable due to the property's nature. Understanding inherent vice is crucial for both policyholders and insurers, as it helps clarify the scope of coverage and risk assessments associated with insuring particular types of property.