Chapter 10

Analysis of Insurance Contracts

Basic Parts of an Insurance Contract

• Declarations: Contains essential information about the insured property or activity.

• Insurer and insured names

• Property location

• Policy period (start and end dates)

• Amount of insurance (coverage limits)

• Premium amount

• Deductible amounts

• Additional relevant information

• Definitions: Clarifies key terms to ease understanding of coverage.

• "We," "us," and "our": refer to the insurer.

• "You" and "your": refer to the insured.

• Words not defined in the policy take standard dictionary meanings.

• Insuring Agreement: A summary of the insurer's major promises regarding what the policy covers.

• Named Perils: Only the perils specifically listed in the policy are covered.

• Open Perils (All Perils): Covers all perils except those specifically excluded by the policy.

• Exclusions: List of perils or types of property not covered by the policy.

• Examples include:

  • Flood

  • War

  • Intentional Loss

  • Limit on cash ($200)

Why Exclusions are Necessary

• Certain perils considered uninsurable (e.g., flood, war).

• Presence of extraordinary hazards (e.g., using personal vehicle for ride-sharing).

• Other contracts may provide coverage (e.g., auto use excluded in homeowners policy).

• Moral & attitudinal hazards (e.g., uninsured cash limits in homeowners policy).

Conditions in Policy

• Provisions that limit or qualify the insurer's obligations.

  • Things you have to do in order to get insurance

• Examples:

  • Prompt notification of loss

  • Protecting property from further damage

  • Valuation/Loss Settlement – Actual Cash Value (ACV) vs. Replacement Cost (RC)

  • Rules against concealment or fraud

  • Subrogation rights

Endorsements/Riders

• Additional provisions that modify or add to the main policy.

• Examples:

  • Replacement cost coverage for personal property

  • Specific exclusions for wind/hail

  • Compliance language with state law (e.g., Uninsured Motorists)

Types of Insureds

• Named Insured: Listed on declarations page.

• First Named Insured: Has special rights and responsibilities.

• Other Insureds: Not directly named but still insured under the policy.

• Additional Insureds: Added via endorsements.

Deductibles

• Amount deducted from loss payment before the insurer pays.

• Purpose:

• Eliminates small claims (costly for insurers).

• Reduces premiums as adjusting small claims is expensive.

• Lowers moral & morale hazards, as the insured shares loss financial responsibility.

Types of Deductibles

• Straight Deductible: Fixed amount per loss.

• Example: $1,000 deductible; if damages are $10,000, insurer pays $9,000; and so on each claim

• Aggregate Deductible: Total amount across losses in a policy period.

  • Typically on health insurance policies

• Example: $1,000 aggregate deductible over multiple incidents.

• Elimination (Waiting) Period: Initial time of a loss where no benefits are paid, common in disability insurance.

Coinsurance in Property Insurance

• Encourages insuring a property to a specified percentage of its value.

• Failure to meet requirements can lead to shared losses.

• Formula:

  • (Amount of insurance carried / Amount of insurance required) X Loss = Insurer's loss payment

  • (did/should) x loss

Real-World Coinsurance Examples

• Property Coinsurance:

• If a commercial building worth $1,500,000 is only insured for $900,000 with an 80% coinsurance clause. $200,000 in fire damages occurs, how will the insurer compensate?

  • Should = 1.5 million x 80$ = 1.2 million

  • (900k/1.2m) x 200k = 150k insurance pays

• Property insurance example:

  • House reconstruction cost = $450,000

  • Amount of Insurance = $325,000

  • Coinsurance = 80%

  • loss = $20,000

    • ($325,000/$360,000) X $20,000 = $18,056

• Health Coinsurance:

• After meeting a deductible, insured pays a specified percentage of medical expenses (e.g., 20% after an 80% coverage).

  • $1,000 deductible

  • 80/20 coinsurance (insurer pays 80%

  • $5,000 medical procedure

• How much does insurer pay?

  • $5,000 - $1,000 (deductible) = $4,000

  • $4,000 x .8 = $3,200 insurer pays this but 800 is left

  • $800 left over the insured pays for leaving them with a total of $1,800 paid by insured

Other-Insurance Provisions

• Rules for scenarios where multiple policies apply

• Prevents profits from losses.

• Pro Rata Liability: Each insurer pays a share based on their coverage percentage.

• Contribution by Equal Shares: Each insurer pays equally until their limits are met or the full loss is funded.

Examples of Other-Insurance Provisions

• Pro-Rata Example:

• Property insured for $500,000 with three insurers having varying coverage levels, determining payment amounts based on coverage.

• Primary and Excess Insurance:

• Primary insurer pays first, while excess insurer covers any payments beyond the primary limits.

• Umbrella insurance is a common example of excess insurance.