Ch 10 ACSC

6 basic parts of an insurance contract

1. declarations—statements that provide information about the particular property/activity to be insured 

ex) identification of insurer, name of insured, premium amount, etc.

2. definitions—key words, phrases with ““ around them…clearly defined meaning of words 

ex) “we”, “our”, “us”, “you”

3. insuring agreement—summarizes the major promises of the insurer

ex) paying certain losses, providing certain services

named peril coverage vs open perils policy 

4. exclusions—excluded perils, excluded losses (losses covered elsewhere), excluded property 

5. conditions—provisions in policy that qualify/place limitations on insurer’s promise to perform (claim denied against policy conditions)

6. miscellaneous provisions

pnc: cancellation, subrogation, requirements

life/health: grace period, misstatement of age

reasons for exclusions

• certain perils are uninsurable (ex: war)

• presence of extraordinary hazards (for fair rates)

• coverage provided by other contratcs

• moral hazard problems (ex: lost cash limit—homeowners)

• attitudinal hazard problems (avoid carelessness)

• coverage not needed by typical insureds (ex: personal jet in homeowners no sense)

first names insured rights/responsibilities

first person listed—has more rights/responsibilities

• right to a premium refund, receipt of a cancellation notice

• responsible for payment of premiums, complying with notice-of-loss requirements

deductibles

provision by which a specified amount is subtracted from the total loss payment that otherwise would be payable—typically found in property, health, auto

straight deductible

commonly found in pnc contracts

the insured must pay a certain amount of dollars in loss before the insurer is required to make a payment 

aggregate deductible

commonly found in pnc contracts

all losses that occur during a specified time period are accumulated to satisfy the deductible amount

after the deductible is satisfied, insurer pays all future losses in full

3 purposes of a deductible

1. eliminate small claims

2. reduce premiums

3. reduce moral hazard and attitudinal hazard

coinsurance

a contracted provision that often appears in pnc contracts—especially true of commercial property insurance contracts

coinsurance clause

in a pnc contracts → encourages the insured to insure the property to a stated percentage of its insurable value. if the coinsurance requirement is not met at the time of loss, the insured must share in the loss as a coinsurer

coinsurance formula and example

(amount of insurance carries) / (amount of insurance required) x loss = amount of recovery

ex) commercial building ACV of 1 million. owner only insured 600k. 80% coinsurance clause → required amount of insurance is 800k. 

if replacement cost policy is used → required amount of insurance is 600k/800k x 100k = 75k. 

Insured has ¾ required amount of insurance, only ¾ loss is paid out (75k). coinsurance requirement is not met so the insured absorbs the remaining amount of loss.

purpose of coinsurance

to achieve equity in rating

most pnc losses are partial losses. But if everyone insures for partial losses, premium rates go up. the rate is inequitable to insureds who want to insure their property to full volume.

coinsurance problems

1. inflation

2. property values fluctuating

solutions:

1. agreed value coverage (insurer agrees upon value beforehand)

2. reporting form (property values periodically reported to insurer

coinsurance in health insurance and its purpose

requires insured to pay a certain percentage of covered medical expenses in excess of the deductible up to some specified annual limit

purpose: reduce premiums, prevent overutilization of policy benefits

pro rata liability clause

provision that applies when 2+ policies of same type cover the same insurable interest in the property

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

purpose of pro rata liability clause

• preserve the principle of indemnity

• prevent profiting from insurance

contribution by equal shares

each insurer shares equally in the loss until the share paid by each insurer = lowest limit of liability under any policy or until full amount of loss is paid

primary and excess insurance

primary insurer pays 1st, excess insurer pays only after policy limits under primary policy are exhausted

ex) in auto—who owns car=primary, who damages=excess