Insurance Contracts

1
Insurance Contracts

• Lecture 7

2
Basic Parts

• Declarations
• Definitions (self explanatory)
• Insuring Agreement
• Exclusions
• Conditions
• Miscellaneous Provisions

3
Declarations

• Statements that provide information about the
  property or activity to be insured
• Usually first page or insert
• Name of insured
• Location of property
• Period of protection
• Amount of premium
• Amount of insurance

4
Insuring Agreement

• Summarizes major promises of insurer
• Two types named-perils all risks
• Named-perils covers only those perils
  specifically named
• Ex H/O fire, wind or hailstorm, lightning
• Burden on insured to prove the loss covered by a
  named peril

5
Insuring Agreement

• All-risks (open perils) covers all losses
  except those specifically excluded
• Burden is on insurer to prove loss was excluded
• Risk of Direct Loss now used
• Life insurance is an all-risks policy

6
Exclusions

• Excluded perils excludes specific causes of
  loss
• Ex H/O flood, earthquake
• Auto exclusion if used as cab
• Excluded losses
• Losses from failure to protect after a loss
• H/O professional liability auto liability
• Excluded property
• H/O certain personal property

7
Reasons for Exclusions

• Some perils uninsurable ex war
• Presence of extraordinary hazards
• Ex using car as taxi v. personal
• Coverage provided by other contracts
• Ex car not covered under H/O
• Moral hazard problems
• Ex H/O and cash
• Coverage not needed ex H/O airplanes

8
Conditions

• Provisions which limit the insurers promise to
  perform
• Imposes duties on the insured
• Notify insurer immediately of loss
• Protecting property after a loss
• Cooperating with insurer in liability lawsuit

9
Definition of insured

• Person or persons for whom protection is provided
• Declarations sections contains Named insured
• Others covered though not named
• H/O spouse, resident relatives, those under 21
  under care of an insured
• Auto spouse, resident relatives, any other using
  auto with permission of named insured

10
Endorsements Riders

• Both are written provisions that adds to, deletes
  from, or modifies provisions of the original
  contract
• Property and liability endorsement
• Ex adding earthquake to H/O
• Life and health riders
• Ex waiver of premium for disability

11
Deductibles

• Amount subtracted from total loss payment
• Found in property, health and auto
• Not found in liability or life
• Purpose
• Eliminate small claims (adm exp gt claim)
• Reduce premiums (large loss principle)
• Help solve moral hazard problem

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Deductible example

• Consider marginal cost of insurance
• Cost of policy with 250 deductible 600
• Cost of policy with 500 deductible 525
• ? paying 75 for an additional 250 of insurance
• Larger deductibles generally preferable

13
Property Deductibles

• Straight deductible insured must pay a certain
  number of of losses before insured pays
• Usually applies to each loss
• Aggregate deductible covered losses for year
  added together insurer pays after deductible met
  (commercial property)

14
Health Deductibles

• Calendar year aggregate deductible
• Corridor deductible deductible on supplemental
  plan
• Elimination (waiting) period stated period of
  time over which no benefits are paid
• Ex disability 60 days

15
Coinsurance

• Usually in property insurance
• Clause requiring insured to insure property for a
  stated percentage of insurable value
• Amount paid
• (Ins carried/Ins required) x Loss
• Ex Building has cash value of 500,000
• 80 required insurer has insured for 300,000
• 10,000 loss paid 300,000/400,000 x 10,000
• 7,500

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Purpose of Coinsurance

• Equity in rating
• Most property insurance losses are partial
• If everyone insured for partial amount, rate
  would be inequitable for those insuring full value

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Insurance to Full Value
18
Insurance to Half Value
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Health Coinsurance

• Usually a percentage participation clause
• Ex 500 deductible 50,500 covered medical
  expenses 80-20 coinsurance
• Insured pays 500 20 x 50,000 10,500
• Insurer pays 80 x 50,000 40,000
• Purpose
• Prevent overuse and reduce premiums

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Other-Insurance Provisions

• Govern payments for losses when more than one
  insurance contract covers same loss
• Pro-rata liability each insurers liability is
  based on proportion of its insurance relative to
  the total
• Purpose Preserve principle of indemnity

21
Pro-Rata Liability Example
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Other-Insurance Provisions

• Contribution by equal shares each insurer
  shares equally in the loss until the share paid
  by each equals the lowest limit liability of any
  policy, or until loss is paid
• See examples on next slide

23
Contributions by Equal Shares
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Primary and Excess

• Primary insurer pays first and excess insurer
  pays after policy limits on first policy are
  exhausted
• Ex Bob drives Jills car
• Jills insurance primary
• Bobs excess