Basic Parts of an Insurance Contract

DeclarationsDefinitionsInsuring agreementExclusionsConditionsMiscellaneous Provisions

Declarations

• Information about the property or activity insured.

• Used for underwriting and rating purposes and for identification of property or activity to be insured.

• To be found on the first page of the policy.

Definitions

• To define clearly the meaning of key words or phrases so that coverage under the policy can be determined easily.

Insuring Agreement

• Summarizes main promises of the insurer and conditions under which losses are paid.

• Two basic forms of agreements in property and liability insurance:– Named perils policy.– All risks policy or open perils policy or risk of

direct loss to property– Burden of proof

Exclusions

• Excluded perils• Excluded losses• Excluded property• Excluded locations• Reasons for exclusions

– Some perils considered uninsurable;– Presence of extraordinary hazards;– Coverage provided by other contracts;– Moral hazard problems;– Coverage not needed by typical insured.

Conditions• Are provisions in the policy that qualify or place limitation on the insurer’s promise to

perform.• Fraud• Notice of loss• Proof of loss• Preservation of property• Cancellation• Assignment• Protection of mortagees

– Separate insurance– Assignment– Loss payable clause– Mortgage Clause

• Obligations of mortagaee– To notify the insurer about change in occupancy, ownership or moral hazard.– To pay premium in case of default.– To render proof of loss in case owner doesn’t– To surrender its claims if insurer pays for the loss.

Miscellaneous Provisions

• Endorsements and Riders– Endorsement to have precedence over contract– But cannot circumvent the legislation.

• Deductibles– Straight Deductible– Aggregate or calendar year deductible– Disappearing deductible P= (L-D) X (1+R)– Where

• P is payment by insurer• L is loss• D is deductible• R is recapture factor

– Franchise deductible– Elimination (waiting) period

Coinsurance• Straight deductible expressed as a percentage in case of health

insurance.• Property to be insured for a stated percentage of its insurable value.• Amount of Recovery = Amount of insurance carried X loss

Amount of insurance required

• Purpose is to achieve equity in rating.• Important points

– Amount paid should never exceed the loss.– Maximum amount paid for any loss should not be more than the

face amount of insurance.• Problems

– Inflation– Fluctuation in property values– In case of small loss

Other Insurance Provisions

• Primary and Excess Insurance

• Prorata Insurance

• Contribution by equal shares