INS 21 Chapter 9

Insurance Policies
Objectives
Elements of a Contract

Distinguishing Characteristics of Insurance Policies

Insurance Policy Structure

Policy Provisions

Property Policy Provisions

Liability Policy Provisions

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Elements of a Contract
An insurance contract also called policy, is an agreement between the insurer and the insured.

Agreement (offer and acceptance)

Agreement exists when the insurer has accepted the applicants offer to buy insurance.
Generally begins when someone who wants to purchase insurance completes an insurance applicationan
offer to buy insurance.
One party must make legitimate offer, and another party must accept the offer.

Capacity to contract
For a contract to be enforceable, all parties must have capacity to contract.
Ineligible for contract:
Being insane or otherwise mentally incompetent
Being under the influence of drugs or alcohol
Being a minor (person not yet of legal age)

Consideration
Something of value given by each party to a contract.
Insurers consideration is its promise to pay a claim in the future if a covered loss occurs.

Legal purpose
An enforceable contract must also have a legal purpose.
Insurance contracts must involve a legal subject matter.
Property Insurance on illegally owned or possessed goods is invalid.

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Distinguishing Characteristics of Insurance
Policies
Contract of indemnity

Principle of indemnity : The principle that insurance policies should provide a benefit no greater than the
loss suffered by an insured.

A contract of indemnity does not necessarily pay the full amount necessary to restore an insured who has
suffered a covered loss to the same financial position.

- Under subrogation provision, the insured cannot collect from both the insurer and the responsible
party.
- Insurable interest principle enforces the principle of indemnity.
- Valued policy policy in which the insurer pays a stated amount in the event of a specified loss (usually
a total loss), regardless of the actual value.
- Example:
A fine arts policy may specify that it will pay $250,000 for loss of a particular painting or sculpture. The
actual market value of the painting or sculpture may be much smaller or much greater than $250,000, but
the policy will pay $250,00 in either case.

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Contd
Contract of Utmost Good Faith
Because insurance involves a promise, it requires complete honesty and disclosure of all relevant facts from
both parties.
Both parties are expected to be ethical in their dealings with each other.
An insurer could be released from a contract because of concealment or misrepresentation by the insured
regarding a material fact.
Concealment an intentional failure to disclosure a material fact.
Misrepresentation a false statement of a material fact on which a party relies.
Material fact In insurance, a fact that would affect the insurers decision to provide or maintain
insurance or to settle a claim.

Contract of Involving Fortuitous Events and the Exchange of Unequal Amounts

Insurance contracts involve an exchange of money for protection upon the occurrence of uncertain, or
fortuitous, events.
Insurance contracts involve an exchange of unequal amounts.
Example:
Assume an insurer charges a $1,000 annual premium to provide auto physical damage coverage on a car
valued at $20,000. The following three situations may occur:
If the car is not damaged while the policy is in force, the insurer pays nothing.
If the car is partially damaged, the insurer pays the cost of repairs, after subtracting a deductible.
If the car is a total loss, the insurer pays $20,000 (minus any deductible)

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Contd
Contract of Adhesion
Contract of adhesion means one party (the insured) must adhere to the agreement as written by the other
party (the insurer).
If the policy working is ambiguous, a court will generally apply the interpretation that favors the insured.

Conditional Contract
An insurance policy is a conditional contract because the parties have to perform only under certain
conditions.

Nontransferable Contract
After an insurance policy is in effect, an insured may not freely transfer the policy to some other party (a
practice called assignment)
Most insurance policies contain a provision that requires the insurers written permission before an insured can
transfer a policy to another party.

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Insurance Policy Structure
An insurance policy is a carefully written contract that describes the agreement between the insured individual
or organization and the insurer.
ISO and AAIS develop industry-wide standardized forms for different types of property-casualty insurance.
Preprinted forms an insurance form that meets the need of may policyholders and is therefore printed in
bulk for future use.
Manuscript forms an insurance form that is drafted according to terms negotiated between a specific
insured (or group of insured) and an insurer.
Policy Classification:
Self-contained common to a large number of insured
Ex: Personal Auto Policy
Modular combines different coverage parts.

Ex: ISO commercial package policy (CPP)

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Contd
Components of the ISO Commercial Package Policy

Commercial Commercial Commercial

Commercial
Property Property Property
Property
Dec Page Coverage Forms Causes of Loss
Conditions Form
Components of a Commercial
Package Policy
Commercial
CGL
General Liability
Coverage Forms
(CGL)
(include conditions)
Dec Page

Crime Crime Crime

Dec Page Coverage Forms General
Provisions Form

Commercial Common Common Policy

= + +
Package Policy Declarations Conditions
Boiler & Machinery
Boiler & Machinery
Coverage Forms
Dec Page
(include conditions)

Inland Marine Inland Marine Inland Marine

Dec Page Coverage Forms Conditions Form

Auto
Auto
Coverage Forms
Dec Page
(include conditions)

Farm Farm
Dec Page Coverage Forms
(include conditions)

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Contd
Endorsements and Other Related Documents
Related Insurance Policy Documents

Related Document Description Example

Application Documented request for coverage, Personal auto policy application

containing information about insured containing relevant insured
and loss exposures information pertinent to driving and
vehicle(s)

Endorsements Documents modifying basic policy Homeowners policy endorsement for

forms home business coverage

Insurers bylaws Insurers corporate bylaws Attachment to policy issued by

mutual insurer giving insured
corporate rights

Relevant statutory terms Incorporation of statute by reference Workers compensation or no-fault

in policy auto insurance statutes

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Policy Provisions
Policy provisions are insurance policy statements communicating the terms of the terms of the insurers and
insureds coverage agreements.
Insurance policys coverage
The types of losses the policy does not cover
Parties contractual responsibilities
Categories of Property-Casualty insurance Policy Provisions
Category Description Effect on Coverage
Declarations Unique information on the insured; list of Outline who or what is covered, and where
forms included in the policy and when coverage applies

Definitions Words with special meaning in policy May limit or expand coverage based on
definitions of terms
Insuring Agreements Statements containing insurers promise State circumstances under which the insurer
to make payment agrees to pay

Conditions Qualifications on promise to make Outline steps insured needs to take to

payment enforce policy
Exclusions Provisions stating what the insurer will Eliminates coverage for excluded persons,
not cover places, things, or action

Miscellaneous Provisions Wide variety of provisions that may alter Deal with the relationship between the
policy insured and the insurer or establish
procedures for implementing the policy

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Contds cont.
Declarations: Purpose of the declarations is to personalize a policy and tailor it to fit a particular policyholders needs.
Policy number
Policy inception and expiration dates
Insurers name
Producers name
Named insured (policyholders name)
Named insureds mailing address
Physical address and description of covered property or operations,etc.

Definitions: Policy terms and its definitions used all through out the contract is listed to help clarify real or perceived
ambiguity.

Insuring Agreements: Purpose is to state in broad terms the insurers promises to the insured.
Conditions: Clarifies the insurers and insureds duties, rights and options.
Insurers obligations may include these duties:
To pay covered losses
To defend the insured from lawsuits
To provide other services to the insured
Insureds obligations:
To pay premiums
To report loss promptly
To provide appropriate documentation for losses
To cooperate with the insurer, as in legal proceedings, for example
To refrain from jeopardizing and insurers rights to recover responsible third parties (subrogate)
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Contd
Exclusions
Serves one or more of these purposes:
Eliminate coverage for uninsurable loss exposures
Ex: war, earthquake, or flood
Assist in managing moral hazards
Assist in managing morale hazards
Reduce the likelihood of coverage duplications
Eliminate coverage that the typical insured does not need
Eliminate coverage requiring special treatment
Assist in keeping premiums reasonable

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Property Policy Provisions
Covered Property
Covered Locations
Floater
Covered Cause of Loss
Named Peril
Special Form or Open Perils Policy
Excluded Causes of Loss
Covered Financial Consequences
Covered Parties
Amounts of Recovery
Policy Limits
Valuation Provisions
Settlement Options
Deductibles
Insurance to value Provisions
Other insurance provisions

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Liability Policy Provisions
Covered Activities
Specific activity : Auto Insurance Liability policy states that claim will be applicable only when it result from
covered auto accidents.
General liability Insurance states that all activities are source of liability except those specifically excluded.
Covered Types of Injury or Damage
Bodily Injury
Physical injury to person, including sickness, disease and death
Property Damage
Personal and Advertising Injury
Excluded Loss Exposure
Covered Costs
Defense Costs
Supplementary Payments
Prejudgment interest
Post judgment interest
Medical Payments

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Contd
Covered Time Period
Occurrence basis coverage
Claims-made coverage
Retroactive date
Covered Parties
Amount of Recovery
Policy limits
Each person limit
Aggregate limit- Maximum amount that insurer will pay during the covered policy period
Each occurrence limit
Split limit ( Bodily Injury ,Property damage)
Single limit ( Bodily Injury + Property damage)
Defense Cost Provisions
Other Insurance Provisions

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Thank you
Apply your knowledge

Sam is an insurance producer. He is having several drinks with his friend Harry at a
bar. Harry decides to leave. He asks Sam whether hell insure him for auto liability,
as he thinks he might need it going home. Sam nods his head. Which of the four
elements of a valid contract may be questionable at this point?

a. Agreement (offer and acceptance)

b. Capacity to contract
c. Consideration
d. Legal purpose

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Feedback
Sam is an insurance producer. He is having several drinks with his friend Harry at a bar. Harry
decides to leave. He asks Sam whether hell insure him for auto liability, as he thinks he might
need it going home. Sam nods his head. Which of the four elements of a valid contract may
be questionable at this point?

a. Agreement (offer and acceptance) offer is vague; and acceptance is vague

b. Capacity to contract both parties may have temporarily lost their legal capacity to
contract while under the influence of alcohol
c. Consideration - Assuming Sam did intend to provide coverage, Harry has not paid
or promised to pay any premium in exchange for the promise to pay any premium
in exchange for the promise of coverage from Sams insurer.
d. Legal purpose

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Apply your knowledge
Evelyns health had worsened to the point she no longer felt capable of driving and
decided to sell her car. John agreed to buy it from her as long as she would assign her
auto policy to him, as his poor driving record prevented him from buying auto insurance
for an amount he determined to be reasonable. Before purchasing Evelyns car, John
took it for a test drive and collided with a wall, totaling the vehicle. John demanded
Evelyns insurer pay him for the value of the car. Which two distinguishing characteristics
of Evelyns insurance policy did Johns demand fail to consider?

a. Contract of Indemnity

b. Contract of utmost good faith

c. Contract involving fortuitous events and the exchange of unequal amounts

d. Contract of adhesion

e. Conditional Contract

f. Nontransferable contract

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 Feedback
Evelyns health had worsened to the point she no longer felt capable of driving and
decided to sell her car. John agreed to buy it from her as long as she would assign her
auto policy to him, as his poor driving record prevented him from buying auto insurance
for an amount he determined to be reasonable. Before purchasing Evelyns car, John
took it for a test drive and collided with a wall, totaling the vehicle. John demanded
Evelyns insurer pay him for the value of the car. Which two distinguishing characteristics
of Evelyns insurance policy did Johns demand fail to consider?

a. Contract of Indemnity due to the fact that John has no insurable interest at the
event on loss.

b. Contract of utmost good faith

c. Contract involving fortuitous events and the exchange of unequal amounts

d. Contract of adhesion

e. Conditional Contract

f. Nontransferable contract Prevents Evelyn from assigning or transferring the policy

to John without her insurers written consent.

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Apply your knowledge

BNY Company has unique property and liability loss exposures that are not adequately
insured under standard property-casualty insurance policies. What type of property-
casualty policy would be the best solution for BNY?

a. Self-contained policy

b. Modular policy

c. Manuscript policy

d. Preprinted policy

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 Feedback
BNY Company has unique property and liability loss exposures that are not adequately
insured under standard property-casualty insurance policies. What type of property-
casualty policy would be the best solution for BNY?

a. Self-contained policy

b. Modular policy

c. Manuscript policy

d. Preprinted policy

Copyright 2013 Accenture All rights reserved. 21

Apply your knowledge
Carol, an insurance agent, is analyzing an insurance policy that contains this provision:

We cover (a) the dwelling on the residence premises shown in the

declarations, including structures attached to the dwelling; and (b) materials and supplies
located on or next to the residence premises used to construct, alter or repair the
dwelling or other structures on the residence premises.

a. Declarations

b. Insuring Agreement

c. Condition

d. Miscellaneous provision

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Feedback
Carol, an insurance agent, is analyzing an insurance policy that contains this provision:

We cover (a) the dwelling on the residence premises shown in the

declarations, including structures attached to the dwelling; and (b) materials and supplies
located on or next to the residence premises used to construct, alter or repair the
dwelling or other structures on the residence premises.

a. Declarations

b. Insuring Agreement it states that the insurer will cover the described types of
property

c. Condition

d. Miscellaneous provision

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