Policy Provisions And Contract Law

This chapter is mainly about:

1. special characteristics of an insurance contract

2. the require elements that must be included in each

3. legal concepts and definitions

4. the purpose of each contract element and provision

1. agreement -offer and acceptance

2. consideration

3. competent parties

4. legal purpose

There must be a definite offer by one part, and the other part must accept this offer in its exact terms. In insurance, the applicant usually makes the offer when submitting the application.

acceptance takes place when an insurer's underwriter approves the appliciation and issues a policy.

In insurance, the applicant usually makes the offer when submitting the application.

acceptance takes place when an insurer's underwriter approves the application and issues a policy.

The binding force in any contract is the consideration. consideration is something of value that each party gives to the other. The consideration on the part of the insured is the payment of premium and the representations made in the application. The consideration on the part of the insurer is the promise to pay in the event of loss.

the parties to a contract must be capable of entering into a contract in the eyes of the law. Generally, this requires that both parties be of

1. legal age

2. mentally competent to understnad the contract

3. and not under the influence of druge or alcohol

every insurance contract must have a legal purpose. This means the conract must be for a lawful reason, and not against public policy.

Representations are statements believed to be true to the best of one's knowledge, but they are not guaranteed to be true. For insurance purposes, representations are the answers the insured gives tot he questions on the insurance application.

untrue statements on the application are considered misrepresentations and could void the contract.

A material misrepresentation is a statement that, if discovered, would alter the underwriting decision of the insurance company. Furthermore, if material misrepresentations are intentional, they are considered fraud.

a warranty is an sbolutely true statment upon which the validity of the insurance policy depends. Breach of warranties can be considered grounds for voiding the policy or a return of a premium. Because of stuch strict definition, statements made by appliacnts for life and helath insurance policies, for example, are usually not cisdered warranties, except in cases of fraud

Concealment is the legal term for the intentional witholding of information of a material fact that is crucial in making a decision. In insurance, concealment is the witholding of information by the applicant that will result in an imprecise underwriting decision. Concealment may void a policy.

a binder is a termporary agreement issued by an agent or insurer providing temporary converage until a policy can be issued. A binder is usually in writing, but may be oral.

binders expire when the policy is issued. However, the policy effective date would be the same as the date when the binder was issued. If the insurer declines to issue the policy, the bidner expires on the date after recipet of the noice of cancellation.

1. declarations

2. definitions

3. insuring agreement

4. additional coverage

5. conditions

6. endorsements

7. exclusions

Declarations is the secition of an insurance policy contraining the basic underwriting information, such as the sinured's name, address, amount of coverage and premiums, and a description of insured locations. It also contains any supplemental representations by the insured. This is usually the first page of the policy

1. insured's name

2. address

3. amount of coverage and premiums

4. description of the insured locations

5. supplemental representations by the insured

the definitions component of an insurance policy clarifies terms used in the policy. Typically, words that are printed in bold, italics, or quotations have a definition as to their meaning in the contract

an insuring agreement is the section of an insurance policy containing the insurer's promise to pay. Among other things, the insuring agreement lists the parties to the contract, effective and renewal dates, and the description of coverage provided, and perils.

1. the insurer's promise to pay.

2. the parties to the contract

3. effective and renewal dates

4. description of coverage provided

5. perils

ex: claim-related expenses, reasonable expenses incurred by an insured to protect damaged property from further loss, and defense expense

1. claim-related expenses

2. reasonable expenses incurred by an insured to protect damaged property from further loss

3. defense expense

conditions is the secition of an insurnac epolicy that indicates the general rules of procedures that the insurer and insured agree to follow under the terms of the policy.

1. Inspections

2. changes to the policy

3. liberalization clause

4. return of premium

Inspections may be made as needed by the insurer. The insurance company reserves the right to inspect or examine the insured's location or books to determine the exact exposre for underwriting and rating purposes.

the liberalization clause ensures that if the insurer introduces an improved free coverage, the insured will get the benfit of the new coverage immediately and will not have to wait for policy renewal

return of premium dictates the method that will be used to calculate the return promium when the policy is cancelled before the expiration date.

the exclusions section of an insurance policy details the perils that are not insured against and what persons are not insured.

exlusions restrict some of the borad terms used in the insuring agreement. This section can exlude people (except a spouse), property, and perils.

exclusions restrict some:

1. broad terms used in the insuring agaement.

2. can include people (not spouse)

3. property

4. perils

1. earth movement

2. water damage

earth movement is excluded if caused

1. earthquake

2. mudflow

3. volcanic eruption

1. flood and subsurface water

2. water that backs up through sewers and drains or overflows from a sump pump

3. water below ground that seeps through basement walls

1. flood and subsurface water

2. water that backs up through sewers and drains

3. water that backs up or overflows from a sump pump

4. water below ground that seeps through basement walls

policy limits (also known as limitations) are the maximum amount an insured may collect, or for which an insured is protected under the terms of hte policy.

limitations

endorsements are printed addendums to a contract that are used to change the policy's original

1. terms

2. conditions

3. or coverages

Endorsements may be included at the time the policy is issued or added during the policy term. Endorsements may be in writing, attached to the policy and signed by an executive officer of the insurer to have any effect on the contract. Endorsement may be used to add or delete coverage, or may be used to crrect items such as the insured name, address, etc.

Endorsement must be in

1. writing

and

2. attached to the policy and signed by an executive officer of the insurer to have any effect on the contract

Endorsements may be used to

1. add or delete coverage

2. or may be used to correct items such as the insured name, address, etc

In property and casualty insurance, an insured is anyone who is covered under the policy, whether named or not. An exampled of an insured would include an unnamed spouse or any resident relative that is a member of the named insured's household.

In property and casualty insurance, an insured is anyone who is covered under the policy, whether named or not

an example of an insured would included an unnamed spous or any resident relative that is a member of the named insured's household.

named insured means the individual*s) whose name appears on the policy's declaration

first named insured is the individual whose name appears first on the policy's declaration.

In commercial insurance policies, the first named insured has control of the policy and is the only insured who may cancel the policy or request changes to the policy, and also is the one responsible for paying premiums and reporting losses.

In commercial insurance policies, the first name insured has

1. control of the policy and

2. is the only insured who may cancel the policy or request changes to the policy

3. and also is the one responsible for paying premiums and reporting losses

Additional insureds are individuals or businesses that are not named as insured on the declaration page, but are protected by the policy, usually in regard to a specific interest.

Additional insured usually are added to the policy by an endorsement

additional insureds usually are added to the policy by an endorsement

In the event of a loss covered by the policy, the named insured is required to:

1. protect the damaged property from further damage

2. prepare an inventory of damaged property

3. cooperate with the insurer in settling the loss

4. notify the police in the case of a theft loss

5. submit to the insurer a signed sworn proof of loss within an alotted amount of time after being requested to do to

an insurance company, in return for premium, must be fair in udnerwriting and must pay covered losses

assignment is the transfer of a legal right or interest in an insurance policy. In property and casualty insurance, assignments of policies are valid only with the prior written consent of the insurer.

In property and casualty insurance, assignment of policies are usually valid only with the prior written consent of the insurer.

if there is a disagreement between the insured and the insurer on the value of any property loss, either party can make a written demand for an appraisal.

Each party will select a competent appraiser who will then select an umpiore if they are unable to agree on a fair value.

If there is a disaggrement between the insured and the insurer on the value of any property loss, either party can make a written demand for an appraisal.

other insurance is a provision in an insuranc epolicy that defines how the policy will respond if there is other valid insurance written on the same risk.

pro rata is a provision found in some property insurance policies that provides for the sharing of loss with other insurnace that may be written on the same risk in the same proportion as their limits of insurance bear to the total of coverage of all polciies covering the risk, whether collectible or not

notice of claim is a form or statment from an insured to an insurer, informing the insurer that events leading to a possible claim have occurred. The notice will include informations as to

1. how

2. when

3. and where the loss took place

The notice of claim will include information as to

1. how

2. when

3. and where the loss took place

proof of loss is a sworng statment that must usually be furnished by the isnured to an insurer before any loss udner a policy can be paid. This form is typically used in the settlemnt of first-part losses, and included the date and description og the occurence and the amount of indemnity claimed

proof of loss is a sworn statement that is typically used in the settlement of first-part losses and includes

1. the date

2. description of the occurrence

3. and the amount of indemnity claimed

the initial claim report to the insurer may be oral or in writing bu the the proof of loss must be in writing. the proof os loss is required near the end of the claim process

cancellation is the termination of an in-force insurance policy, by either the insured or the insurer, prior to the expiration date shown in the policy. Termination may be voluntary, involuntary, or in mutual accordance with provisions contained in the policy

a mortgagee clause is attached to a policy to protect the interest of the mortgagee in the mortgaged property. When a mortgagee is named in a mortgagee clause attached to a fire policy or other direct damage policy, the loss reimbursement will be paid to the mortgagee as interest appears. The mortgagee's rights of recovery will not be defeated by any negligence of the insured. The mortgagee is also given other rights, such as bringing a suit in their own name to recover damages.

a part of the underwriting process is to determine the insurability o f the applicant. INsurers have several resources for gathering information, most of which must be agreed to by the insured in writing before the insurer can use them. The following are some of the sources that may be usedin the underwriting process:

1. application form

2. motor vehicle records

3. interviews with neighbors, firends, and employers

4. inspection of property

5. and inspection of insurance history

the application is a printed form that includes questions about a prospective insured and the desired insurance coverage and limits. It provides the underwriter with information for accepting or rejecting the prospective insured and rating the desired polcy. Some policies make the application part of the policy. Misrepresentations in the application can void the policy