AINS Insurance Policies

Question 1

Validity of a contract depends on four essential elements:

Answer 1

1. Agreement (offer and acceptance)
2. Capacity to contract
3. Consideration
4. Legal purpose

If a court cannot confirm the presence of all four elements, it will not enforce the contract.

Question 2

Agreement (Offer and Acceptance)

Answer 2

parties to the contract must be in agreement

one party makes a legitimate offer, and the other party must accept

In legal terms, there must be a “mutual assent”

in an uncomplicated case, an UW accepts the application and agrees to provide the coverage requested at a premium. An agreement exists; the insurer has accepted the applicant’s offer to buy insurance.

in an complicated case, the UW may not be willing to meet all the requests of the applicant. UW option is to accept app with mods. OR UW provide coverage, but only on somewhat diff terms, such as a higher deductible. When the UW communicates the proposed mods to the app, this constitutes a counteroffer.

Question 3

Capacity to Contract

Answer 3

for a contract to be enforceable, all parties must have capacity to contract- this means all parties must have the legal capacity to make the agreement binding. They must be competent. So, they cannot be:
insane or mentally incompetent
under the influence of drugs or alcohol
a minor

however, some minors can purchase auto insurance, especially when auto insurance qualifies as a necessity. state laws vary in regard to issues involving minors.

Question 4

Consideration

Answer 4

something of value or bargained for and exchanged by the parties to a contract. for ex. when an auto is purchased, the buyer gives money (consideration) to the seller, who, in turn, provides the car (also a consideration).

some contracts do not exchange good for good but instead involve performance. for ex. an author may sign a contract to write a book in exchange for payment by the publisher. or a performance can involve a promise to perform some act in the future. In insurance, the insurer’s consideration is its promise to pay a claim in the future if a covered loss occurs. If no loss occurs, the insurer is still fulfilling its promise to provide financial protection even though it doesn’t pay a claim. Two types of considerations are involved in insurance contract:

1. the insured’s consideration is the payment of (or the promise to pay) the premium
2. the insurer’s consideration is its promise to pay claims for covered losses

Question 5

Legal Purpose

Answer 5

an enforceable contract must also have a legal purpose

courts may consider a contract illegal if its purpose is against the law or public policy

courts will refuse to enforce any insurance policy that is illegal or that tends to injure the public welfare.

for ex. insurance contract will not be enforceable if the policy covers fireworks in a state where fireworks are illegal.

Question 6

Insurance Contracts

Answer 6

In terms of the elements of a contract, an insurance application is an offer.

an insurance contract (policy) must meet the same requirements as any other valid contract.

all insurance policies are contracts. This unique subset of contracts has the same four essential elements that all contracts have, but, because of the specialized function it serves of transferring risk from an insured to an insurer, it also has certain distinguishing characteristics. Each of these distinguishing characteristics allows the transfer of risk to occur more efficiently.

Question 7

Distinguishing Characteristics of Insurance Policies: Contract of Indemnity

Answer 7

purpose of insurance is to indemnify the insured who has suffered a loss, to restore a party to the same financial position that the held before the loss occurred. Most property and liability insurance policies are contracts of indemnity.

Property insurance generally pays the amount to repair or to replace.

Liability pays to a third-party claimant any amounts (up to the policy limit) for damages and legal costs associated with that claim.

Does not necessarily pay the full amount to restore an insured who has suffered a covered loss to the same financial position, most policies contain a policy limit that specifies the max amount they will pay for a single claim.

according to the principal of indemnity, the insured should not profit from a covered loss and policies generally contain various provisions to clarify that the insured cannot collect more than the amount of the loss. for ex policies generally contain an “other insurance” provision to prevent an insured from receiving full payment from two diff policies for the same claim. similar to subjugation. The insured cannot collect from both the insurer and the responsible party. if the insured is not fully indemnified by the insurer’s loss payment, for ex, because of a deductible, the laws of many states require the insurer to pay, out of its subrogation recovery, the additional amount needed to indemnify the insured.

a person usually cannot buy insurance unless that person is in a position to suffer a financial loss. the insured must have an insurable interest in the subject of the insurance. for ex prop insurance contracts cover losses only to the extent of the insured’s insurable interest in the property. This restriction prevents an insured from collecting more from the insurance than the amount of the loss he or she suffered.
a person cannot buy life insurance on the life of a stranger, hoping to gain when they die. insurers normally sell life insurance when there is a reasonable expectation of a financial loss from the death of the insured person, such as loss of an insured’s future income that the insured’s family would face.

Some insurance contracts are not contracts of indemnity but valued policies. when a specified loss occurs, a valued policy pays a stated amount, regardless of the actual value of the loss. for ex, a fine arts policy may specify that it will pay $250,000 for the loss of a particular painting or sculpture. The actual market value may be smaller or greater, but it’s going to pay the 250 either way.

Question 8

Distinguishing Characteristics of Insurance Policies: Contract of Utmost Good Faith

Answer 8

because insurance involves a promise, it requires complete honesty and disclosure of all relevant facts from both parties.

insurance contracts are considered contracts of utmost good faith- an obligation to act in complete honesty and to disclose all relevant facts.

the insurer that acts in bad faith, such as denying coverage for a claim that is clearly covered, could face serious penalties under the law.

the insurer has a right to expect that the insured will act in good faith, such as intentionally concealing info or misrepresents facts doesn’t act in good faith and thus the insurer could be released from a contract because of concealment or misrepresentation by the insured regarding a material fact (a fact that would affect the insurer’s decision to provide or maintain insurance or to settle a claim).

Question 9

Distinguishing Characteristics of Insurance Policies: Contract Involving Fortuitous Events and the Exchange of Unequal Amounts

Answer 9

insurance contracts involve an exchange of money for protection upon the occurrence of uncertain, or fortuitous, events. Insurance contracts involve exchange of unequal amounts- few or no losses and the premium paid by the insured i more than the amount paid by the insurer to, or on behalf of, the insured. BUT if a large loss occurs, that the claim payment might be much greater than the premium paid by the insured.

Question 10

Distinguishing Characteristics of Insurance Policies: Contract of Adhesion

Answer 10

wording in insurance contracts is usually drafted by the insurer, enabling the insurer to use preprinted forms for many different insureds, and because the insurer determines the exact wording of the policy, the insured has little choice but to “take it or leave it”. the insured must adhere to the contract drafted by the insurer. Thus, insurance policies are considered to be contracts of adhesion- one party must adhere to the agreement as written by the other party.

if a dispute arises about the meaning of certain words or phrases in the policy, they are not on an equal basis. if the policy wording is ambiguous, a court will generally apply the interpretation that favors the insured.

Question 11

Distinguishing Characteristics of Insurance Policies: Conditional Contract

Answer 11

the parties have to perform only under certain conditions

the insurer pays a claim depends on whether a covered loss occurred

the insured must fulfill certain duties before a claim is paid, such as giving prompt notice to the insurer after a loss has occurred.

a covered loss might not occur during a particular policy period, but it’s not worthless. the insured acquires a valuable promise from the insurer to make payments if a covered loss occurs. there’s still the promise, even if the insurer’s performance is not required during the policy period.

Question 12

Distinguishing Characteristics of Insurance Policies: Nontransferable Contract

Answer 12

Once the two parties entered into a contract, the insured may not freely transfer the policy to some other policy (called “assignment”). if this happened, the insurer may be bound with someone they may not wish to insure. most insurance policies contain a provision that requires the insurer’s written permission before an insured can transfer a policy to another party.

Question 13

Preprinted Forms

Answer 13

an insurance form that meets the needs of many policyholders and is therefore printed in bulk for future use.

most insurers use standard preprinted policy forms

ISO and AAIS develop industry-wide standardized forms for different types of property-casualty insurance. An insurer may develop its own nonstandard, preprinted forms.

Question 14

Manuscript Forms

Answer 14

an insurance form that is drafted according to terms negotiated between specific insured (or group of insureds) and an insurer. for example, an insurer might develop a manuscript form to cover the unique liability exposures of a highly specialized profession.

Question 15

Self-Contained Policies

Answer 15

a single document that contains all the agreements between the insured and the insurer and that forms a complete insurance policy.for example, a personal auto policy, most drivers have similar auto insurance needs, a self-contained personal auto policy serves the needs of most insureds.

Question 16

Modular Policies

Answer 16

an insurance policy that consists of several different documents, none of which by itself forms a complete policy. if a customer seeks a variety of overages that may not be common to a large number of insureds, the insurer may choose to offer a modular policy to tailor a policy to an insured’s specific needs.
the ISO commercial package policy is an example of a modular policy because it combines different coverage parts to meet the insured’s particular needs.
Coverage Parts- a component of a CPP or a monoline policy that contains the policy provisions relating to a particular line of business, such as commercial property or commercial general liability; consists of the coverage part’s declarations page, one or more coverage forms, applicable endorsements, and in some cases a general provisions form.
Each ISO-type CPP begins with two component documents:
a set of common policy conditions and common declarations
In most cases, a separate declarations page is included for each coverage part contained in the CPP

Question 17

Endorsements and Other Related Documents: Endorsement

Answer 17

adds to or modifies an insurance policy

may conflict with the provision of the policy to which the endorsement is attached. for example, a preprinted policy form may contain an exclusion, and an endorsement attached to the policy may delete the exclusion. if the policy and the endorsement contain conflicting terms, the endorsement takes precedence.

Question 18

Endorsements and Other Related Documents: Insurer’s Bylaws and Statutory Provision

Answer 18

for ex mutual and reciprocal insurance policyholders typically have rights and duties associated with managing the insurer’s operations; the policy specifies these rights and duties by incorporating corporate documents.
policies providing workers compensation insurance or auto no-fault insurance are among those that provide benefits required by state statues. the insurance policy usually doesn’t contain the relevant statutes but incorporates them by reference. for ex. a standard workers comp policy issued by the National Council on Compensation Insurance (NCCI) contains the following statement instead of detailing the types and amounts of benefits payable:
We will pay promptly when due the benefits required of you by the workers compensation law

Question 19

Policy Provisions

Answer 19

insurance policy statements that lay out the terms of the insurer’s and insured’s coverage agreements.

Policy provisions typically fits within 1 of 6 categories, depending on the provision's purpose. there is the 
Declaration
Definitions
Insuring Agreements
Conditions
Exclusions
Miscellaneous Provisions

Question 20

Declarations

Answer 20

identifies the parties, info specific to the policy (insurer’s and insured’s names, locations, subject of insurance).

Outlines who or what is covered, and where and when coverage applies.

Purpose of the declarations is to personalize a policy and tailor it to fit a particular policyholder’s needs. Declares info about the insured and summarizes the coverage provided

Question 21

Definitions

Answer 21

defines policy terms to help clarify real or perceived ambiguity.

May limit or expand coverage based on definitions of terms

Question 22

Insuring Agreements

Answer 22

Often follows the declarations

purpose is to state in broad terms the insurer’s promises to the insured. State circumstances under which the insurer agrees to pay.

A policy providing more than one coverage can have more than one insuring agreement. for example, the Personal Auto Policy (PAP) contains provisions for liability, medical payments, uninsured motorist, and physical damage coverage with each having its own insuring agreement.

Usually introduces a coverage section such as coverage extensions, additional coverage, and supplemental payments

Question 23

Conditions

Answer 23

clarifies the insurer’s and insured’s duties, rights, and options. Outline steps insured needs to take to enforce policy.

may be found in the forms, endorsements, or other documents that together make up the entire insurance policy.

the insured must comply with the conditions for a policy to cover a loss, the insurer will perform its promise then.

Insurer’s obligations, as stated in the insuring agreement, may include:

1. to pay covered losses
2. to defend the insured from lawsuits
3. to provide other services to the insured

Insured’s obligations, when stem from policy conditions, may include:

1. to pay premiums
2. to report losses promptly
3. to provide appropriate documentation for losses
4. to cooperate with the insurer, as in legal proceedings, for ex
5. to refrain from jeopardizing an insurer’s rights to recover from responsible third parties (subrogate)

if the insured fails to perform these duties, the insurer might be released from its policy obligations

Question 24

Exclusions

Answer 24

Eliminates coverage for excluded persons, places, things, or actions, policy provisions that state what the insurer will not cover.

Typically appear in the exclusions section of the policy, but can be contained in other policy sections such as insuring agreements or definitions

Primary function is not only to limit coverage but also to clarify the coverages granted by the insurer

Purposes:

1. to eliminate coverage for uninsurable loss exposures, those that are not generally insurable such as war, earthquake, or flood
2. assist in managing moral hazards- exaggerated or intentionally caused losses for the purpose of collecting insurance proceeds, help minimize loss exposures that are affected by moral hazards
3. assist in managing morale hazards- help insurers minimize loss exposures that are affected by morale hazards
4. reduce the likelihood of coverage duplications, exclusions ensure that policies work together to provide complementary, but not duplicate, overages
5. eliminate coverages that the typical insured doesn’t need for example a policy might exclude coverage for destruction of a motorboard because many insureds do not own one. Watercraft policies or endorsements can provide this coverage
6. eliminate coverage requiring special treatment- these coverages might require rating, underwriting, risk control, or other treatment that differs from that normally applied to the policy. an ex is workers comp coverage, which is normally provided in a self-contained policy.
7. assist in keeping premiums reasonable- these exclusions allow insurers to decline loss exposures that would increase overall insurance costs, but by excluding them, insurers can offer less costly premiums.

Question 25

Miscellaneous Provisions

Answer 25

Insurance Policies can contain miscellaneous provisions that do not qualify strictly as declarations, definitions, insuring agreements, conditions, or exclusions. May deal with the relationship between the insured and the insurer, help establish procedures for implementing policy, etc.

may affect coverage, but do not have the force of conditions, so consequentially, if the insured doesn’t follow procedures specified in the miscellaneous provisions, the insurer typically still must fulfill its contractual promises.

Question 26

Covered Property

Answer 26

often described broadly in an insurance policy and then refined through limitations and exclusions

in residential, a permanent structure is called a dwelling and covers this and supplies located on or next to the premises used to construct, alter, or repair the premises. Not included is the land on which the home is located, any secondary residence, and personal property.

in commercial insurance, a permanent structure with walls and a roof is usually called a building. Permanently installed fixtures, machinery, and equipment are included as part of the building. Other outdoor structures such as carports, antenna towers, and swimming pools are not considered buildings but can be insured. a typically commercial property policy covers the building or structure described in the declarations.

Commercial property policies usually refer to the contents of buildings as business personal property (BPP)

property insurance policies usually clarify what property is covered by listing those that are not covered, such as not covering autos as they are better covered by auto policies.

Question 27

Covered Locations

Answer 27

buildings are covered at the fixed location stated in the policy, but some parts/portions of a building may be removed from the premises for repair or storage.

some property insurance covers personal property that may not remain at a fixed location. For example, an auto policy will typically provide coverage while the insured’s auto is in the US or its territories. commercial property insurance is more restrictive; they typically provide coverage for the insureds business personal property while it is in the insured building or within 100 ft of the building. There are coverage extensions that provides a certain limit, such as $10,000 of coverage for property off-premises; but only applies to losses that occur in the specified policy territory.

a floater insurance policy covers personal property that moves from one place to another.

Question 28

Covered Causes of Loss

Answer 28

examples of covered causes of loss include fire, lightning, windstorm, hair, and theft

many property insurance policies list their covered cases of loss. such policies are commonly known as named perils policies because they name/list the covered perils. usually also list the causes of loss that are excluded.

Special Form or Open Perils Policies- policies that cover all causes of loss except the named exclusions

Difference between named perils and open perils involves burden of proof:
1. for coverage to apply on named perils policy, the insured must prove that the loss was cause by a covered cause of loss
2. for coverage to apply on an open perils policy, it is initially assumed that coverage applies. However, coverage may be denied if the insurer can prove that the loss was caused by an excluded cause of loss.
Burden of proof is on the insured on the first one, the burden of proof is on the insurer on the second one.

Personal and Commercial property insurance policies on buildings and personal property are available with three different levels of coverage: Basic, Broad, and Special (Open)
Basic: covers approx 1 dozen named perils
Broad: adds to Basic
Special: covers all that are not specifically excluded, once described as “all-risks” coverage, less used because it may be misinterpreted to mean that no causes of loss are excluded

For auto: coverage includes collision, other than collision (aka comprehension), and specified causes of loss coverage. Because Collision costs considerably more than insurance against all other auto physical damage perils combined, it is not included with comprehension or specified and must be purchased as a separate coverage.

Question 29

Excluded Causes of Loss

Answer 29

property insurance typically excludes numerous causes of loss

some perils that affect many people at the same time are regarded as uninsurable because the resulting losses would be so widespread and the insurance business might inadequate to pay all the claims. So all property insurance policies exclude coverage for losses from catastrophes such as war and nuclear hazard. most policies providing coverage on buildings and personal property would exclude earthquake and flood as both would be hitting the same geographic area at the same time and can be catastrophic. Floods, can sometimes be predicted. and if property in a low-lying area near rivers, creeks, or streams the question is not whether floods will occur, but when and insurers are generally unwilling to provide coverage for a loss that is certain to occur.

Question 30

Covered Financial Loss

Answer 30

Property insurance policies must specify which financial consequences of a property loss are covered and which are not.

a property loss can lead to a reduction in property value (aka direct loss)

extra expenses and loss income (aka indirect loss, or time element losses).

Question 31

Deductables

Answer 31

Serves several functions:

1) encourage the insured to try to prevent the loss because the insured will bear the cost of the loss
2) by shifting some of the cost of loss, the insurer can reduce premiums
3) handling small claims costs more than the dollar amount of the claim

Thus, deductibles encourages the insured to purchase policies for the small, serious losses at a reasonable price without involving the insurer in small losses

Question 32

Insurance-to-Value Provisions

Answer 32

This is a provision in the policy that encourages the insureds to purchase an amount of insurance that provides close to, or exact amount to cover the value of the covered property. Total losses are not as frequent as partial losses, things do happen and so it is good risk management to insure their property at full value.

Insurers develop property insurance rates on the assumption that all policyholders insure their property to at least 80% of its full value. If policyholders do not insure their property to that level, use of the insurer’s property rates will result in premiums that are inadequate to cover all losses that the insurer must pay. Consequently, insurers encourage their insureds to buy insurance to value or to insure to a high percentage of the property’s value. This approach to get insurance to value is to include a coinsurance provision in the policy- provision that states that if the property is underinsured, the insurer will pay for the covered loss is reduced.

Sometimes more than one insurance policy provides coverage for the same item of property. If two or more insurers paid for the same loss, the insured could profit from the loss, violating the principle of indemnity. Thus, most policies contain an “other insurance” provision that deals with this problem. This means that when more than one policy covers a loss, the amount paid by each policy depends on the allocation procedure specified in the “other insurance” provisions of the policies.

Question 33

Basic Form Coverage:

Answer 33

covers items such as:
fire, lightning, windstorm, hair, aircraft, vehicle damage, riot/civil commotion, explosion, smoke, vandalism, sprinkler leakage, sinkhole collapse, and volcanic action

Question 34

Broad Form Coverage:

Answer 34

covers Basic as well as others such as:

falling objects, weight of snow, ice, or sleet, accidental leakage of water from a plumbing system

Question 35

Special Form Coverage:

Answer 35

covers all loss that are not specifically excluded.

Question 36

Homeowners Policies also provide coverage for Lost Income

Answer 36

when a covered loss damages the part of a residence that an insured rents or holds for rental to others, “fair rental value” coverage in the homeowners policy indemnifies the insured for the loss of rental income until the rented portion of the residence is restored to livable condition.

Question 37

Mortgagee vs Loss Payee

Answer 37

Mortgagee- a secured lender that provided the funds to help finance the purchase of an insured property, usually not named insured, a bank or another financing institution

Loss Payee- a secured lender that provided the funds to help finance the purchase of an insured property, usually not named insured, a party that is entitled to share in whatever loss payment an insured receives.

Question 38

Liability Insurance: Covered

Answer 38

Liability claim involves three parties: the insured, the insurer, and the claimant (third party).

Liability uses two approaches to defining covered activities: Specific activity or source of liability covered (such as auto), or covers all activities or sources of liability that are not specifically excluded (such as general). The extent of coverage depends to a large degree on the exclusions, general liability excludes coverage that are better handled by other liability insurance policies such as watercraft, workers comp, auto, and professional. And nearly all liability policies exclude losses that arise from war and nuclear hazard.