Common Policy Provisions
● Insurance policies are standardized forms, most of which are created by ISO or AAIS
● Provisions within the policy establish terms of the agreement
What are ISO and AAIS?
● National organizations
● Produce standardized insurance forms for insurers to use
● Collect statistical data
● Provide rating information
● Work with state regulators on behalf of subscribing insurers
Cancellation and Nonrenewal Condition
● Sets rights and duties of both insurer and insured if either cancels
● Policyholder can cancel anytime with notice
● Insurer’s right to cancel is subject to state insurance laws
● Generally, insurer must provide written notice for cancellation or nonrenewal
● Insurer can cancel with fewer days’ notice for non-payment of premiums
Unearned Premiums
● Policyholder pays premiums before receiving full coverage
● If policy is canceled early, insurer must pay back any money it received for
coverage it never gave
● Insurer counts unearned premiums among liabilities
Unearned Premiums Example
Suppose you make an annual payment of $1,200 for your homeowners insurance. If your insurer cancels the coverage one month after you’ve paid your annual premium, they would then have to refund you $1,100 for the 11 months of coverage you paid for but never received.
Changing a Policy
Policy changes added by endorsement and agreed upon by both insurer and insured
Liberalization Clause
If insurer broadens policy coverage in course of business, policies already issued must include this increase if the change:
● Occurred during the policy period (or even shortly before policy period for some policies)
● Did not raise the policy premium
Representations Condition
● Policy coverage is based on information the insured provided
● If insured gives false information, the insurer can void the policy
Concealment, Misrepresentation, and Fraud
● Protects the insurer from the dishonesty of the insured
● Insured cannot omit or misrepresent material facts
Concealment, Misrepresentation, and Fraud Example
If the insured were to hide certain facts about the services offered by his business (failing to mention that the business serves alcohol, for instance), this would count as concealment.
Similarly, if the insured were to tell his insurer that he doesn’t smoke, when in fact he does, the insurer could deny health insurance coverage if the insured were to get lung cancer from smoking.
Policy Rescission
● Rescinding a policy means declaring that it was never a valid agreement
● Can only be done under certain circumstances, such as material, intentional, or
fraudulent misrepresentation
An insurer can rescind a policy if the policyholder:
- Lied or concealed information in the application
- Made a mistake in the application that significantly affects the insurer
- Made a fraudulent claim to get benefits
Assignment Provision
Policy is non-transferable unless insurer agrees
Exception: death
If insured dies, coverage transfers to the decedent’s legal representative
Additional Insured
Person or organization that is added to the policy at the First Named Insured’s request and who benefits from policy, but may not make changes
Additional Insured
Example
The policyholder of a personal auto policy may add a family member to the policy by name, and the policy may also state that coverage is provided to any person using the insured vehicle with the policyholder’s permission.
Other Insurance / Apportionment
● Guidelines for settling claims when more than one policy covers the damages
● Enforces principle of indemnity by keeping people from “double recovering” for
a loss
Primary:
policy pays up to the limit, regardless of presence of another policy
Excess:
policy only pays once the primary policy’s limits have been exhausted
Contribution of Equal Shares
● Each policy pays an equal share of the loss up to lowest policy limit
● Process repeats until loss is paid in full or all policy limits have been reached
Pro Rata
Policies split the loss, based on percentage of coverage each policy provides
Pro Rata Example
Say Annie’s dwelling policy has a limit of $100,000 and her husband takes out another $50,000 policy. The total amount of insurance covering the property is $150,000.
Annie’s policy makes up 2/3 of the insurance on the property, since $100,000 is 2/3 of $150,000.
So, if a loss occurs, Annie’s policy will pay 2/3 of the loss, and the other policy will pay the other third.
Nonconcurrency
The situation in which two or more policies covering the same risk have different inception and expiration dates
Overinsurance
The amount of insurance covering a risk which exceeds the insurable value of that risk
● Insurer will only pay up to the insurable value
● Fraudulent intent voids the contract
Restoration / Non-reduction of Limits
Common options:
● Restore limits to original level
● Loss does not reduce limits at all
● Total loss payout ends policy coverage and excess premiums returned to insured
Legal Action Against an Insurer
Sets requirements the insured must meet before suing the insurer:
● Insured must comply with all policy obligations
● Insurer is not liable for damages above policy limit
Legal Action Against an Insurer
Liability Policies:
● No one can join the insurer in lawsuit against insured
● No one can sue insurer until insurer’s obligation is determined
Insured’s Duties in the Event of a Loss:
● Notify the police if the loss may have involved a crime
● Notify the insurer about what property was involved, and the circumstances
surrounding the loss
● Submit a description o f how, where, and when the loss occurred
● Try to prevent further damages, a nd keep track of expenses incurred doing this
● Give insurer a list of damaged property (Commercial policies may ask for a list
of damaged and undamaged inventory, too)
● Submit to examination under oath
● Sign a sworn proof of loss for the insurer, if requested
● Let the insurer appraise damages to covered properties by inspecting them (including any company records or books when dealing with commercial
policies)
● Cooperate in all investigations and settlement procedures
Exclusions serve many purposes:
● Remove coverage for uninsurable losses
● Manage moral and morale hazards
● Eliminate duplication of coverages
● Remove coverages that typical consumers don’t need
● Remove coverages that need special treatment
● Lower premiums
Common Exclusions
● Intentional acts ● Neglect ● Normal wear and tear, or deterioration ● Ordinance or law (laws regulating the use, construction, repair, or demolition of a structure) ● Government or civil confiscation ● Off-premises power failure ● War ● Nuclear events
Covered in auto policies, but excluded in other property policies
● Earth movement (earthquakes, mudslides, landslides, etc.)
● Flood or water damage from water below the ground, above ground, or back
up through sewers or drains
Vacancy Condition
● Defines “vacancy” for the purpose of coverage
● Specifies a time period (typically 60 days) and a condition, such as a dwelling
that is unoccupied or a company that is not open for business
● Commercial buildings may be deemed vacant if less than 31% of the available
square footage is occupied for the set time period.
Vacancy Condition Example
Vacant buildings are at a greater risk of damage caused by water leaks, freezing, vandalism, and theft-damages that may have been mitigated or avoided if someone had been around to take care of the property
Recovered Property
If one party recovers damaged property after the claimant was indemnified, that party must notify the other party
● If the insured wishes to keep the property, she must return the money to the insurer
● If the insured wishes to keep the money, she must forfeit her right to the property to the insurer
Salvage
The portion or value of property that remains after a loss
Ways to handle salvage
● Insurer deducts salvage value from settlement amount
● Insurer takes ownership of damaged property after paying for the full value of
the damaged property
Abandonment Clause
Insured may not force the insurer to take possession of damaged property for the purpose of repair or disposal
Different than salvage, where the insurer chooses to take possession of the damaged property after paying to replace it
Pair & Set Provision
Applies when part of a set or an instrumental part of a whole is lost or destroyed
Pair & Set Provision
Pays either:
● To replace, restore, or repair the set, or
● The difference in actual cash value resulting from the loss
Premium Audit
● Insurer accepts a deposit premium, based on estimate of risk
● Then at end of policy term, insurer audits actual exposure and calculates actual
premium
Inspection and Surveys
Insurer may inspect premises any time and recommend changes
Examination of Books and Records
Insurer has right to inspect business records up to three years after policy expires
Loss Payment Provision
Claims will be paid:
To Whom?
How?
When?
To Whom?
● The policyholder(s), up to the amount of his insurable interest
● Loss payees listed in declarations
How?
● The actual cash value (ACV)
● The cost of repairing or replacing (RC)
● The agreed or appraised value
● The cost of repairing or replacing with “like kind and quality”
When?
Deadline for payment is regulated by state law and varies from state to state
Company’s Options (Standard Fire Policy)
● Provision listing the insurer’s claim settlement options
● Insurer must notify claimant of its choices within 30 days of proof of loss
Loss Payable Clause (or Loss Payee Clause)
● Lender listed as loss payee if a loss occurs
● Protects lender’s interest in insured property
● Allows insurers to compensate a lender if a property, in which the lender has a
financial interest, is damaged
Mortgage Clause (a.k.a. Mortgageholders Condition)
States the mortgagee’s rights in relation to the insurance contract
Mortgagee:
the bank or lender that holds the insured’s mortgage
The mortgagee has the right to:
● Receive a portion of claims payments, based on their insurable interest in the
property
● Be notified if the policyholder fails to adhere to, or pay premiums on, the
insurance contract
● Pay premiums to keep the policy active without the insured’s consent in order
to continue protection
The lender can still be indemnified, even if the insured intentionally damages the property (the insured would not get any money in this case).
Recoverable Depreciation
● Applies to Replacement Cost policies
● Insurer pays claim based on ACV
● Once repairs are complete, claimant submits proof to insurer
● Insurer pays remainder, based on actual replacement cost minus what it
already paid
● Insured typically must notify insurer of plans to repair or replace within 180
days of when the loss occurred
Recoverable Depreciation Example
Jim’s house experienced $100,000 of damage from Hurricane Andy. Jim is fully insured. The adjuster estimates that depreciation, based on age and condition of the home, is 30%, therefore the ACV of the loss is $70,000 (less the deductible). But the policy insures the dwelling for Replacement Cost. The 30% depreciation is called “Recoverable Depreciation” which Jim can collect once repairs are complete and he has submitted proof to the insurer.
So Jim’s insurer will only pay $70,000 for his $100,000 loss at first. Then, once Jim has completed the repairs, the insurer will pay the remaining difference, up to $30,000.
Control of Property
● Protects property from damage caused by the negligent acts of persons other than the named insured
● Protects property from damage caused on purpose by a non-policyholder
● A breach in policy conditions only affects the property where the actual breach
occurred
Control of Property Example
A business owner has purchased an insurance policy to cover his office space, and one of his employees commits a negligent act that results in the destruction of covered business property. Under the Control of Property condition, insurance coverage would still apply
No Benefit to Bailee
States that coverage does not benefit a third party that has custody or control of the insured’s property
Bailee:
A business that holds the property of others for the purpose of storage, repair, or servicing
No Benefit to Bailee Example
Acme & Co. contracts ABC Trucking to deliver some products to a customer. If the product is damaged in transit, Acme & Co.’s insurance policy will not cover the loss. Such a loss would be the responsibility of ABC Trucking’s insurance policy.
Similarly, if Amanda’s car is damaged while being serviced in Greg’s auto repair shop, Greg’s insurance policy would be responsible for covering the damage, not Amanda’s.
Separation of Insureds
● Each insured is covered separately, even against other insureds
● Also called “severability of interests”
● Limits of policy still apply collectively
Separation of Insureds Example
Two people on a policy does not mean double the indemnity for a single occurrence.
Duties of the Claimant
● Cooperate with insurer’s investigation
● Report claim promptly
● Allow physical examinations
Duties of Injured Person
● Give insurer proof
● Authorize access to medical records
● Have a physical exam
Bankruptcy of the Insured
Bankruptcy of insured does not relieve insurer of its obligations
Cancellation and Nonrenewal
Insured may cancel at any time, but insurer is much more restricted
Liberalization
Insureds benefit automatically, at no extra cost, when an insurer expands coverage
Concealment, Misrepresentation, and Fraud
can invalidate coverage and lead to
policy rescission.
Assignment
Insureds cannot transfer policy coverage to someone else without insurer’s approval
Apportionment
Defines how policy will respond when more than one policy covers the same risk
Restoration of Limits
Defines how limits are affected after a loss
Insureds must fulfill several duties after a_______.
loss
Some of the common exclusions you’ll find in insurance policies are _______ ____, wear and tear, war, and nuclear events
intentional
acts
_____ refers to the value remaining after a loss.
Salvage
Insureds are prohibited from abandoning_______ to the insurer.
property
______ ______ is the amount an insured can be paid under a
replacement cost policy after making repairs to damaged property.
Recoverable Depreciation
_____ and Mortgagee clauses protect lender’s interest.
Loss Payee
Control of _____ protects insured’s property from negligent actions committed by other people.
Property
Insurer has the right to _____a company’s insured premises, as well as company books and records.
inspect
Severability of Insurance means that, if more than one person is insured under same _____, each is covered separately, though the same policy limit applies to all insureds put togethe
policy
An ______ third party must also cooperate with the insurer’s investigation (not just the policyholder).
injured
An insured’s ______ does not relieve the insurer from its obligation to pay covered claims.
bankruptcy
