Ch. 10 Analysis of Insurance Contracts

Basic Parts of an Insurance Contract

• declarations

• definitions

• insuring agreement

• exclusions

• conditions

• endorsements/rider

Declarations

statements that provide information about the particular property or activity to be insured

Definitions

• key words or phrases are defined so that coverage under the policy can be determined more easily

• for any words NOT defined by the policy, the standard dictionary definition applies

Insuring Agreement

summary of the major promises of the insurer (what the policy covers)

Named Perils

only those perils specifically named in the policy are covered

Open Perils (all perils, special coverage)

all perils are covered except for those that are specifically

Exclusions

perils or property that are not covered under the policy

Why are exclusions necessary?

• certain perils considered uninsurable

• presence of extraordinary hazards

• coverage provided by other contracts

• moral hazard

• attitudinal hazard

• coverage not needed by typical insureds

Conditions

provisions in the policy that qualify or place limitations on the insurer promise to perform

Endorsements/Riders

provisions that add to, delete from, or modify the original/main policy

Types of Insureds

named insured, first name insured, other insureds, additional insureds

Named Insured

the person(s) or party named on the declarations page of the policy

First Named Insured

has certain additional rights and responsibilities that do not apply to other named insureds

Other Insureds

persons or parties who are insured under the policy even though they are not specifically named, have coverage even if not named

Additional Insureds

person or party added to the policy by an endorsement, added by name

Deductible

a provision by which a specified amount is subtracted from the total loss payment that would otherwise be payable (basically how much the insurance company isn’t gonna cover)

Why have deductibles?

• eliminate small claims

• reduce premiums

• reduce moral and morale hazard

Straight Deductible

the amount the insured is responsible for per loss before the insurer pays anything

Aggregate Deuctible

the amount the insured is responsible for in total (overall losses during the policy period) before the insurer pays anything

Elimination (Waiting) Period

stated period of time at the beginning of a loss during which no insurance benefits are paid

Coinsurance (in property insurance)

• encourages the insured to insure the property at a stated percentage of its insurable

• if coinsurance requirement is not met at the time of loss, the insured must share the loss (as a coinsurer)

Insurer’s Loss Payment Equations

(Amount of Insurance carried/Amount of Insurance required) x Loss = Insurer’s Loss Payment

Coinsurance (in health insurance)

• provision that requires the insured to pay a specified percentage of covered medical expenses after the deductible is met

• reduces premiums and prevents overutilization

Other-Insurance Provisions

• provisions for when multiple insurance policies apply

• prevents the insured from profiting from a loss

Pro Rata Liability

each insurer’s share of a loss is based on the proportion that its insurance bears to the total amount of insurance on the property

Contribution by Equal Shares

until the share paid by each insurer equals the lowest limit of liability under any policy, or until the full amount of the loss is paid

Primary and Excess Insurance

primary insurer pays first, and the excess insurer pays only after the policy limits under the primary policy are exhausted