Basic Parts of an Insurance

Contract
Declarations
Definitions
Insuring agreement
Exclusions
Conditions
Miscellaneous 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