Elements of Insurance Contracts and Policy Structure

Elements of a Contract

• Agreement (Offer and Acceptance)

  • A contract starts with a clear offer from one party and acceptance by another.
  • Insurance Example: The applicant makes an offer by submitting an insurance application. Acceptance occurs when the insurer’s underwriter approves it and issues a policy.

• Consideration

  • Refers to the exchange of value that makes the contract enforceable.
  • Insured’s Consideration: Payment of premiums and truthful statements on the application.
  • Insurer’s Consideration: A binding promise to compensate for covered losses.

• Competent Parties

  • Both parties must be legally competent.
  • Competency Requirements:
  • The insured must be of legal age (usually 18+).
  • The insured must be mentally sound and comprehend the contract terms.
  • The insured must not be under the influence of substances at the time of agreement.

• Legal Purpose

  • The insurance contract must serve a lawful reason.
  • Contracts promoting illegal activities or violating public policy are unenforceable.

Representations, Warranties, and Concealment

• Representations

  • Statements by the insured that are believed to be true but not guaranteed.
  • Example: Claiming non-smoker status on a health insurance application.

• Misrepresentations

  • Untrue statements on an application.
  • Material Misrepresentation: A statement that could influence the insurer’s underwriting decision.
  • Fraudulent Misrepresentation: Intentional dishonesty leading to policy cancellation and legal consequences.

• Warranties

  • Absolutely true statements critical for policy validity. Breach can lead to voidance or denial of claims.

• Concealment

  • Intentional withholding of critical information.
  • Omitting significant details may result in contract voidance.

Binders

• A binder is a temporary contract providing coverage until a formal policy is issued.
• It can be verbal or written, serving as evidence of immediate protection.
• Expires upon issuance of the official policy; its effective date remains as stated in the binder.
• If coverage is declined, the binder expires upon cancellation notice date.

Policy Structure

• Declarations

  • Found on the first page; includes underwriting details:
  • Policyholder’s name/address
  • Coverage type/amount
  • Policy term/premium amount
  • Description of insured locations/property.

• Definitions

  • Clarifies specific terms within the policy, often formatted distinctly to indicate defined meaning.

• Insuring Agreement

  • Core of the policy outlining the insurer’s promise to pay, including covered risks and perils.

• Additional/Supplementary Coverage

  • Provides extra coverage for specific expenses without extra premiums (e.g., legal defense costs).

• Conditions

  • States the obligations of both insured and insurer (e.g., right to inspect).
  • Example: Premium refunds calculated based on unused coverage if canceled.

• Endorsements

  • Legal modifications to the policy; must be executed by an insurer’s executive.

• Exclusions

  • Lists perils not covered (e.g., earth movement, water damage).

• Policy Limits

  • Maximum amount payable for a covered loss, which may apply per claim or per term.

Insured and Insurance Company

• Definition and Duties of the Insured
  • The insured is anyone covered by the policy, regardless of whether named.
  • Named insured: the individual(s) listed on the policy's declarations.
  • First named insured: has control over the policy (can cancel/change it, responsible for premiums).
  • Additional insureds: not named but protected under the policy, usually via endorsement.

Obligations of the Insured and Insurance Company

• Insured’s Duties in Event of Loss:

  • Protect property from further damage, prepare an inventory of it, cooperate with investigations, notify authorities about theft, submit signed proof of loss (typically within 60 days).

• Insurance Company’s Obligations:

  • Fair underwriting and prompt claims settlement once liability is determined.

Provisions and Clauses

• Assignment

  • Transfer of rights/interest in a policy requires insurer approval.

• Appraisal

  • Resolving disputes on claim value; appraisers may be appointed, with a third-party umpire if necessary.

• Other Insurance

  • Explains how the policy interacts with other valid insurance covering the same risk.

• Pro Rata

  • Shares loss with other insurance in proportion to their coverage limits, adhering to the principle of indemnity.

• Notice of Claim

  • Insured must inform insurer as soon as possible post-loss; proof of loss (written statement) required from the insured before payment (60 days).

• Cancellation & Nonrenewal

  • Cancellation terminates the policy before expiration. Nonrenewal means the insurer does not extend coverage past the expiration date.

• Mortgagee Rights

  • Protects lenders, ensuring claim payments go directly to them, irrespective of the insured's negligence.

Loss Settlement Methods

• Actual Cash Value (ACV)
  • Depreciated value payout.
• Replacement Cost
  • Full cost to replace property, excluding depreciation.
• Agreed Value
  • Pre-determined value for unique/high-value items.

Policy Territory

• Defines where coverage is valid.

Sources of Insurability

• Common sources include application form, motor vehicle records, property inspections, interviews, insurance history.

Fair Credit Reporting Act (FCRA)

• Establishes procedures for consumer reporting agencies, ensuring confidentiality, accuracy, and proper use of records to protect consumers from inaccurate information.

Underwriting Process and Insurability Determination

• Insurers assess risk levels using various factors.
• Two primary report types for underwriting: Consumer Reports and Investigative Consumer Reports, retrieved by legitimate business purposes only.

Privacy Protection – Gramm-Leach-Bliley Act (GLBA)

• Limits sharing of nonpublic personal information unless conditions met, including customer disclosure and opt-out opportunity.
• Requires privacy disclosures at the relationship's establishment and before sharing information.

Terrorism Risk Insurance Act (TRIA)

• Created a federal program helping insurers manage risks from terrorism; mandates insurers provide terrorism coverage with government reimbursement for losses.

Recap

• Elements of a Legal Contract: Agreement, Consideration, Competent Parties, Legal Purpose.
• Legal Terms: Representations, Misrepresentations, Material Misrepresentation, Warranty, Concealment.
• Binders: Temporary agreements. Expiration on issuing actual policy.
• Policy Components: Declarations, Definitions, Insuring Agreement, Additional Coverage, Conditions, Endorsements, Exclusions, Policy Limits.