An insurance policy is a legal contract between the insurance company (the insurer) and the person(s), business, or entity being insured (the insured).
Reading your policy helps you verify that the policy meets your needs and that you understand your and the insurance company’s responsibilities if a loss occurs. Many insureds purchase a policy without understanding what is covered, the exclusions that take away coverage, and the conditions that must be met in order for coverage to apply when a loss occurs. The SCDOI would like to remind consumers that reading and understanding your entire policy can help you avoid problems and disagreements
with your insurance company in the event of a loss. Show
The Basics of an Insurance ContractThere are four basic parts to an insurance contract:
It is important to understand that multi-peril policies may have specific exclusions and conditions for each type of coverage, such as collision coverage, medical payment coverage, liability coverage, and so on. You will need to make sure that you read the language for the specific coverage that applies to your loss. The Declaration PageThis page is usually the first part of an insurance policy. It identifies who is the insured, what risks or property are covered, the policy limits, and the policy period (i.e. time the policy is in force). For example, the Declarations Page of an automobile policy will include the description of the vehicle covered (e.g. make/model, VIN number), the name of the person covered, the premium amount, and the deductible (the amount you will have to pay for a claim before an insurer pays its portion of a covered claim). Similarly, the Declarations Page of a life insurance policy will include the name of the person insured and the face amount of the life insurance policy (e.g. $25,000, $50,000, etc.). The Insuring AgreementThis is a summary of the major promises of the insurance company and states what is covered. In the Insuring Agreement, the insurer agrees to do certain things such as paying losses for covered perils, providing certain services, or agreeing to defend the insured in a liability lawsuit. There are two basic forms of an insuring agreement:
The ExclusionsExclusions take coverage away from the Insuring Agreement. The three major types of Exclusions are:
Typical examples of excluded perils under a homeowners policy are flood, earthquake, and nuclear radiation. A typical example of an excluded loss under an automobile policy is damage due to wear and tear. Examples of excluded property under a homeowners policy are personal property such as an automobile, a pet, or an airplane. The ConditionsConditions are provisions inserted in the policy that qualify or place limitations on the insurer’s promise to pay or perform. If the policy conditions are not met, the insurer can deny the claim. Common conditions in a policy include the requirement to file a proof of loss with the company, to protect property after a loss, and to cooperate during the company’s investigation or defense of a liability lawsuit. DefinitionsMost policies have a Definitions section, which defines specific terms used in the policy. It may be a stand-alone section or part of another section. In order to understand the terms used in the policy, it is important to read this section. Endorsements and RidersAn insurer may change the language or coverage of a policy at the time of the policy renewal. Endorsements and Riders are written provisions that add to, delete, or modify the provisions in the original insurance contract. In most states, the insurer is required to send you a copy of the changes to your policy. It is important that you read all Endorsements or Riders so you understand how your policy has changed and if the policy is still adequate to meet your needs. Want to Review Your Policy?To obtain a copy of your insurance policy, please contact your insurance agent or company. There are certain types of insurance most people need to have. For example, if you own a home then homeowner's insurance may be standard. Auto insurance covers your vehicle while life insurance protects you and your loved ones in a worst-case scenario. When your insurer gives you the policy document, it's important to read through it carefully to make sure you understand it. Your insurance advisor is always there for you to help you with the tricky terms in the insurance forms, but you should also know for yourself what your contract says. In this article, we'll make reading your insurance contract easy, so you understand their basic principles and how they are put to use in daily life. Key Takeaways
Insurance Contract EssentialsWhen reviewing an insurance contract, there are certain things included that are typically universal.
ImportantYou may not want to sign an insurance contract if you don't fully understand the terms without first consulting an insurance expert. Contract ValuesThis section of an insurance contract specifies what the insurance company may pay out to you for an eligible claim, as well as what you may pay to the insurer for a deductible. How these sections of an insurance contract are structured often depends on whether you have an indemnity or non-indemnity policy. Indemnity ContractsMost insurance contracts are indemnity contracts. Indemnity contracts apply to insurances where the loss suffered can be measured in terms of money.
(To read more on indemnity contracts, see "Shopping for Car Insurance" and "How Does the 80% Rule for Home Insurance Work?") There are some additional factors of your insurance contract that create situations in which the full value of an insured asset is not remunerated.
Non-Indemnity ContractsLife insurance contracts and most personal accident insurance contracts are non-indemnity contracts. You may purchase a life insurance policy of $1 million, but that does not imply that your life's value is equal to this dollar amount. Because you can't calculate your life's net worth and fix a price on it, an indemnity contract does not apply. A life insurance contract typically includes the following:
When you've determined that life insurance is something you need, it's important to compare the options carefully. For example, you may lean toward term life insurance versus permanent life insurance if you don't need lifetime coverage. Or you may prefer permanent coverage if you're treating life insurance like an investment. In either scenario, it's important to shop around to find the best life insurance companies. (For more information on non-indemnity contracts, read "Buying Life Insurance: Term Versus Permanent" and "Shifting Life Insurance Ownership.") Insurable InterestIt is your legal right to insure any type of property or any event that may cause financial loss or create legal liability for you. This is called insurable interest. Suppose you are living in your uncle's house, and you apply for homeowners insurance because you believe that you may inherit the house later. Insurers will decline your offer because you are not the owner of the house and, therefore, you do not stand to suffer financially in the event of a loss. When it comes to insurance, it is not the house, car or machinery that is insured. Rather, it is the monetary interest in that house, car or machinery to which your policy applies. It is also the principle of insurable interest that allows married couples to take out insurance policies on each other's lives, on the principle that one may suffer financially if the spouse dies. Insurable interest also exists in some business arrangements, as seen between a creditor and debtor, between business partners or between employers and employees. TipIn life insurance contracts, someone with an insurable interest can include your spouse, your children or grandchildren, a special needs adult who is also a dependent or aging parents. Principle of SubrogationSubrogation allows an insurer to sue a third party that has caused a loss to the insured and pursues all methods of getting back some of the money that it has paid to the insured as a result of the loss. For example, if you are injured in a road accident that is caused by the reckless driving of another party, you will be compensated by your insurer. However, your insurance company may also sue the reckless driver in an attempt to recover that money. The Doctrine of Good FaithAll insurance contracts are based on the concept of uberrima fides, or the doctrine of utmost good faith. This doctrine emphasizes the presence of mutual faith between the insured and the insurer. In simple terms, while applying for insurance, it becomes your duty to disclose your relevant facts and information truthfully to the insurer. Likewise, the insurer cannot hide information about the insurance coverage that is being sold.
Depending on their nature, these statements may either be representations or warranties. A) Representations: These are the written statements made by you on your application form, which represent the proposed risk to the insurance company. For instance, on a life insurance application form, information about your age, details of family history, occupation, etc. are the representations that should be true in every respect. Breach of representations occurs only when you give false information (for example, your age) in important statements. However, the contract may or may not be void depending on the type of the misrepresentation that occurs B) Warranties: Warranties in insurance contracts are different from those of ordinary commercial contracts. They are imposed by the insurer to ensure that the risk remains the same throughout the policy and does not increase. For example, in auto insurance, if you lend your car to a friend who doesn't have a license and that friend is involved in an accident, your insurer may consider it a breach of warranty because it wasn't informed about this alteration. As a result, your claim could be rejected. As we've already mentioned, insurance works on the principle of mutual trust. It is your responsibility to disclose all the relevant facts to your insurer. Normally, a breach of the principle of utmost good faith arises when you, whether deliberately or accidentally, fail to divulge these important facts. There are two kinds of non-disclosure:
For example, suppose that you are unaware that your grandfather died from cancer and, therefore, you did not disclose this material fact in the family history questionnaire when applying for life insurance; this is innocent non-disclosure. However, if you knew about this material fact and purposely held it back from the insurer, you are guilty of fraudulent non-disclosure. When you supply inaccurate information with the intention to deceive, your insurance contract becomes void.
Other Policy AspectsThe Doctrine of Adhesion. The doctrine of adhesion states that you must accept the entire insurance contract and all of its terms and conditions without bargaining. Because the insured has no opportunity to change the terms, any ambiguities in the contract will be interpreted in their favor. Principle of Waiver and Estoppel. A waiver is a voluntary surrender of a known right. Estoppel prevents a person from asserting those rights because they have acted in such a way as to deny interest in preserving those rights. Presume that you fail to disclose some information in the insurance proposal form. Your insurer doesn't request that information and issues the insurance policy. This is a waiver. In the future, when a claim arises, your insurer cannot question the contract on the basis of non-disclosure. This is estoppel. For this reason, your insurer will have to pay the claim. Endorsements are normally used when the terms of insurance contracts are to be altered. They could also be issued to add specific conditions to the policy. Co-insurance refers to the sharing of insurance by two or more insurance companies in an agreed proportion. For the insurance of a large shopping mall, for example, the risk is very high. Therefore, the insurance company may choose to involve two or more insurers to share the risk. Coinsurance can also exist between you and your insurance company. This provision is quite popular in medical insurance, in which you and the insurance company decide to share the covered costs in the ratio of 20:80. Therefore, during the claim, your insurer will pay 80% of the covered loss while you shell out the remaining 20%. Reinsurance occurs when your insurer "sells" some of your coverage to another insurance company. Suppose you are a famous rock star and you want your voice to be insured for $50 million. Your offer is accepted by the Insurance Company A. However, Insurance Company A is unable to retain the entire risk, so it passes part of this risk—let's say $40 million—to Insurance Company B. Should you lose your singing voice, you will receive $50 million from insurer A ($10 million + $40 million) with insurer B contributing the reinsured amount ($40 million) to insurer A. This practice is known as reinsurance. Generally, reinsurance is practiced to a much greater extent by general insurers than life insurers. The Bottom LineWhen applying for insurance, you will find a huge range of insurance products available in the market. If you have an insurance advisor or broker, they can shop around and make sure that you are getting adequate insurance coverage for your money. Even so, a little understanding of insurance contracts can go a long way in making sure that your advisor's recommendations are on track. Furthermore, there may be times when your claim is canceled because you didn't pay attention to certain information requested by your insurance company. In this case, a lack of knowledge and carelessness can cost you a lot. Go through your insurer's policy features instead of signing them without delving into the fine print. If you understand what you're reading, you'll be able to ensure that the insurance product that you are signing up for will cover you when you need it most. What is the consideration given by an insurer in the consideration clause of a life policy quizlet?What is the consideration given by an insurer in the Consideration clause of a life policy? Consideration is given by the insurer by promising to pay a death benefit to a named beneficiary.
What is a consideration given by an insurer in the consideration clause of life policy?Consideration. This is the premium or the future premiums that you have to pay to your insurance company. For insurers, consideration also refers to the money paid out to you should you file an insurance claim.
What is the consideration given by an insurer quizlet?Finally, each party must give consideration, something of value. In an insurance policy contract, the insured's consideration is his premium payment, and the insurer's consideration is the promise of indemnity. Intent is not a requirement for a valid contract.
What is the consideration in a policy?Consideration — the value received to bind a contract; also, payment for an annuity.
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