Most people need to have certain forms of insurance contract. For instance, homeowner’s insurance would be expected if you own a home. While life insurance safeguards you and your loved ones in the worst-case situation, auto insurance covers your vehicle.
It’s crucial to carefully study the insurance material your insurer provides you with to ensure that you comprehend it. Although your insurance advisor is always there to assist you with the complex terminology in the insurance paperwork, you should also be aware of what your contract specifically states. This post will explain how to easily read your insurance policy so that you can comprehend its fundamental ideas and how to use them in daily life.
Insurance Contract Essentials
There are some clauses in insurance contracts that are commonly included in all insurance contracts.
- Offer and Acceptance. When applying for insurance, the first thing you do is get the proposal form of a particular insurance company. After filling in the requested details, you send the form to the company (sometimes with a premium check). This is your offer. If the insurance company agrees to insure you, this is called acceptance. In some cases, your insurer may agree to accept your offer after making some changes to your proposed terms.
- 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. This means that each party to the contract must provide some value to the relationship.
- Legal Capacity. You need to be legally competent to enter into an agreement with your insurer. If you are a minor or are mentally ill, for example, then you may not be qualified to make contracts. Similarly, insurers are considered to be competent if they are licensed under the prevailing regulations that govern them.
- Legal Purpose. If the purpose of your contract is to encourage illegal activities, it is invalid.
The amount that the insurance company may pay you for an acceptable claim is outlined in this clause of the insurance contract, together with the amount that you may be required to pay the insurer as a deductible. Whether you have an indemnity or non-indemnity policy will typically determine how these portions of an insurance contract are written.
Most insurance policies contain indemnity clauses. Indemnity contracts are used for insurance policies where the loss incurred is quantifiable in monetary terms.
Principle of Indemnity. This states that insurers pay no more than the actual loss suffered. The purpose of an insurance contract is to leave you in the same financial position you were in immediately prior to the incident leading to an insurance claim. When your old Chevy Cavalier is stolen, you can’t expect your insurer to replace it with a brand new Mercedes-Benz. In other words, you will be remunerated according to the total sum you have assured for the car.
There are some additional factors of your insurance contract that create situations in which the full value of an insured asset is not remunerated.
- Under-Insurance. Often, in order to save on premiums, you may insure your house at $80,000 when the total value of the house actually comes to $100,000. At the time of partial loss, your insurer will pay only a proportion of $80,000 while you have to dig into your savings to cover the remaining portion of the loss. This is called under-insurance, and you should try to avoid it as much as possible.
- Excess. To avoid trivial claims, the insurers have introduced provisions like excess. For example, you have auto insurance with the applicable excess of $5,000. Unfortunately, your car had an accident with the loss amounting to $7,000. Your insurer will pay you the $7,000 because the loss has exceeded the specified limit of $5,000. But, if the loss comes to $3,000 then the insurance company will not pay a single penny and you have to bear the loss expenses yourself. In short, the insurers will not entertain claims unless and until your losses exceed a minimum amount set by the insurer.
- Deductible. This is the amount you pay in out-of-pocket expenses before your insurer covers the remaining expense. Therefore, if the deductible is $5,000 and the total insured loss comes to $15,000, your insurance company will only pay $10,000. The higher the deductible, the lower the premium and vice versa.
Non-indemnity contracts include life insurance policies and the majority of personal accident policies. Although you might get a $1 million life insurance policy, this does not mean that your life is worth that much money. An indemnification contract does not apply because it is impossible to estimate the value of your entire life and set a price on it.
A life insurance contract typically includes the following:
- Declarations page: This is often the first page of a life insurance policy and it includes the policy owner’s name, the policy type and number, issue date, effective date, premium class or rate class and any riders you’ve chosen to add on. If you purchased a term life policy, the declarations page should also specify the length of the coverage term.
- Policy terms and definitions: You may see a separate section in your life insurance contract that breaks down terms and definitions, including death benefit, premium, beneficiary and insurance age. Your insurance age may be your actual age or the nearest age assigned to you by the life insurance company.
- Coverage details: The coverage details section of a life insurance contract provides in-depth information about your policy, including how much you’ll pay for premiums, when those payments are due, penalties for missing payments and who your policy’s death benefits should be paid out to. For example, you may have just one primary beneficiary or a primary beneficiary with several contingent beneficiaries.
- Additional policy details: There may be a separate section in your life insurance contract that covers riders if you’ve chosen to add any on. Riders expand your policy’s coverage. Common life insurance riders include accelerated death benefit riders, long-term care riders and critical illness riders. These add-ons allow you to tap into your death benefit while still living if you need money to cover expenses related to a terminal illness.
When you’ve decided that life insurance is something you require, it’s critical to carefully weigh your options. If you don’t require lifetime coverage, for instance, you might favor term life insurance over permanent life insurance. If you view life insurance as an investment, you might want permanent coverage.
In either case, it’s crucial to compare prices from several life insurance providers.
You have the legal right to get insurance for any kind of property or circumstance that could result in monetary loss or make you liable in court. It’s known as insurable interest.
Imagine that you are residing in your uncle’s home and that you have applied for homeowners insurance because you think you might one day inherit the property. Because you do not own the property and will not incur financial loss in the event of a loss, insurers will reject your offer. The house, automobile, or equipment is not what is insured when it comes to insurance. Instead, the part of that property, automobile, or piece of equipment to which your insurance applies is the financial interest in it.
As a result of the idea that one spouse would suffer financially in the event of the other’s death, the principle of insurable interest also permits married couples to purchase life insurance policies on one another. Additionally, in some business agreements, such as those between business partners, creditors and debtors, or between employers and employees, there may be insurable interest.
Principle of Subrogation
To recover some of the money it has given to the insured as a result of the loss, subrogation enables an insurer to file a lawsuit against a third party who has injured the insured.
For instance, your insurance will pay you if you suffer injuries in a car accident that was brought on by someone else’s careless driving. However, in an effort to recoup that money, your insurance company might also file a lawsuit against the careless driver.
The Doctrine of Good Faith
The idea of uberrima fides, or the tenet of absolute good faith, is the cornerstone of all insurance contracts. The mutual trust between the insured and the insurer is emphasized by this doctrine. In other words, it becomes your responsibility to tell the insurer all the pertinent facts and information when you apply for insurance. In the same way, the insurer is not allowed to conceal details of the insurance coverage that is being marketed.
- Duty of Disclosure. You are legally obliged to reveal all information that would influence the insurer’s decision to enter into the insurance contract. Factors that increase the risks—previous losses and claims under other policies, insurance coverage that has been declined to you in the past, the existence of other insurance contracts, full facts and descriptions regarding the property or the event to be insured—must be disclosed. These facts are called material facts. Depending on these material facts, your insurer will decide whether to insure you as well as what premium to charge. For instance, in life insurance, your smoking habit is an important material fact for the insurer. As a result, your insurance company may decide to charge a significantly higher premium as a result of your smoking habits.
- Representations and Warranty. In most kinds of insurances, you have to sign a declaration at the end of the application form, which states that the given answers to the questions in the application form and other personal statements and questionnaires are true and complete. Therefore, when applying for fire insurance, for example, you should make sure that the information that you provide regarding the type of construction of your building or the nature of its use is technically correct.
Depending on their nature, these statements may either be representations or warranties.
Representations: These are the written assertions you made on your application form to the insurance provider to describe the potential risk. For instance, on a life insurance application form, the representations that should be true in every way include information about your age, family background, occupation, etc. Only when you disclose inaccurate information (such your age) in crucial statements does a representational breach arise. Nevertheless, depending on the kind of misrepresentation that takes place, the contract may or may not be void.
Warranties: Compared to standard business contracts, insurance contracts have various warranties. They are imposed by the insurer to guarantee that the risk does not change and stays the same over the course of the policy. If you lend your car to a buddy who doesn’t have a license and that friend gets into an accident, for instance, your auto insurer can view it as a breach of warranty because it wasn’t made aware of this change. Your claim could be disregarded as a result.
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:
- Innocent non-disclosure relates to failing to supply the information you didn’t know about
- Deliberate non-disclosure means providing incorrect material information intentionally
For instance, let’s say you did not reveal in the family history questionnaire when applying for life insurance that your grandfather passed away from cancer since you were not aware of this important detail; this is known as innocent non-disclosure. However, you are guilty of fraudulent non-disclosure if you intentionally withheld this substantial fact from the insurer despite knowing it to exist.
When you supply inaccurate information with the intention to deceive, your insurance contract becomes void.
- If this deliberate breach was discovered at the time of the claim, your insurance company will not pay the claim.
- If the insurer considers the breach as innocent but significant to the risk, it may choose to punish you by collecting additional premiums.
- In case of an innocent breach that is irrelevant to the risk, the insurer may decide to ignore the breach as if it had never occurred.
Other Policy Aspects
The 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 typically used when changing the conditions of insurance contracts. They might also be issued to amend the policy’s terms with particular requirements.
The sharing of insurance by two or more insurance companies at an established ratio is referred to as co-insurance. The risk is particularly significant, for example, when insuring a sizable shopping center. As a result, the insurance firm may decide to divide the risk among two or more insurers. You and your insurance provider may also have a coinsurance arrangement. This clause, where you and the insurance company agreed to split the covered costs 20:80, is extremely common in medical insurance. Therefore, during the claim, your insurer will pay 80% of the covered loss while you shell out the remaining 20%.
When your insurer “sells” a portion of your coverage to another insurance provider, this is known as reinsurance. Consider that you are a well-known rock star who wants $50 million in voice insurance. The Insurance Company A has approved your offer. Insurance Company A passes on a portion of this risk—let’s say $40 million—to Insurance Company B because it is unable to assume the entire risk. If you lose your singing voice, insurer A will pay you $50 million ($10 million plus $40 million), with insurer B paying insurer A the reinsured sum ($40 million). Reinsurance is the term for this action. Reinsurance is typically utilized significantly more by general insurers than by life insurers.
There are many different insurance products on the market that you can choose from when applying for insurance. If you have a broker or advisor for insurance, they can do some comparison shopping and make sure you are receiving good value for your money. To ensure that your advisor’s advice are sound, it can help to have a basic understanding of insurance contracts.
Additionally, there may be instances where your claim is rejected because you neglected to provide the details that your insurance provider specifically requested. Carelessness and a lack of information might cost you dearly in this situation. Examine the details of your insurer’s policies before signing them without reading the small print. Understanding what you’re reading will help you make sure that the insurance policy you’re purchasing will protect you when you’ll need it most.