Types of insurance contract
Certain types of insurance are required by the majority of people. For example, if you own a home, you may be required to have homeowner's insurance. Auto insurance protects your vehicle, whereas life insurance protects you and your loved ones in the event of a disaster.
When your insurer hands you the policy document, read it carefully to ensure that you understand it. Your insurance advisor is always available to assist you with the jargon in insurance forms, but you should also understand what your contract states. In this article, we'll show you how to read your insurance contract so you can understand its basic principles and how to apply them in everyday life.
Insurance Contract Requirements
When reviewing an insurance contract, certain things are usually included that are universal.
- Acceptance and offer The first step in applying for insurance is to obtain a proposal form from a specific insurance company. You send the form to the company after filling in the requested information (sometimes with a premium check). This is your proposal. Acceptance occurs when the insurance company agrees to insure you. In some cases, your insurer may agree to accept your offer after you make some changes to the terms you propose.
- Consideration. This is the premium or future premiums you must pay to your insurance company. Consideration also refers to the money paid out to you by insurers if you file an insurance claim. This means that each contract party must contribute something to the relationship.
- Legal Capability To enter into an agreement with your insurer, you must be legally competent. You may not be able to make contracts if you are a minor or mentally ill, for example. Similarly, insurers are considered competent if they are licensed under the applicable regulations.
- Legal Intention. Your contract is invalid if its purpose is to encourage illegal activities.
If you do not fully understand the terms of an insurance contract, you should not sign it without first consulting an insurance expert.
Contract Terms and Conditions
This section of an insurance contract specifies how much the insurance company will pay you for an eligible claim and how much you will pay the insurer for a deductible. The structure of these sections of an insurance contract is frequently determined by whether you have an indemnity or non-indemnity policy.
Contracts of Indemnity
The vast majority of insurance contracts are indemnity contracts. Indemnity contracts are used in insurance where the loss can be quantified in terms of money.
Indemnity principle. This provision states that insurers will not pay more than the actual loss suffered. The goal of an insurance contract is to put you in the same financial position you were in prior to the incident that resulted in an insurance claim. You can't expect your insurer to replace your stolen Chevy Cavalier with a brand new Mercedes-Benz. In other words, you will be paid based on the total amount you have guaranteed for the car.
(For more information on indemnity contracts, see "How Does the 80% Rule for Home Insurance Work?" and "Shopping for Car Insurance.")
There are some additional factors in your insurance contract that can result in situations where the full value of an insured asset is not reimbursed.
- Under-Insurance. In order to save money on premiums, you may insure your home for $80,000 when the total value is actually $100,000. In the event of a partial loss, your insurer will only pay a portion of $80,000, leaving you to dip into your savings to cover the remainder of the loss. This is known as under-insurance, and it is something you should try to avoid as much as possible.
- Excess. In order to avoid frivolous claims, insurers have implemented provisions such as excess. For example, suppose you have auto insurance with a $5,000 excess. Unfortunately, your car was involved in an accident that resulted in a $7,000 loss. Your insurer will pay you $7,000 because the loss exceeded the specified $5,000 limit. However, if the loss exceeds $3,000, the insurance company will not pay a dime, and you must bear the loss expenses yourself. In short, insurers will not consider claims unless and until your losses exceed a predetermined amount.
- Deductible. This is the amount you pay out of pocket before your insurer covers the rest of the cost. As a result, if your deductible is $5,000 and your total insured loss is $15,000, your insurance company will pay only $10,000. The lower the premium, the higher the deductible, and vice versa.
Non-Indemnity Agreements
Non-indemnity contracts include life insurance and the majority of personal accident insurance policies. You can buy a $1 million life insurance policy, but that does not mean that your life is worth that much money. An indemnity contract does not apply because you cannot calculate and price your life's net worth.
A life insurance policy typically includes the following provisions:
- Declarations page: This is typically the first page of a life insurance policy and includes the policy owner's name, policy type and number, issue date, effective date, premium class or rate class, and any riders you've chosen to include. If you bought a term life insurance policy, the declarations page should also state the length of the coverage term.
- Policy definitions and terms: Your life insurance contract may contain a separate section that defines and defines terms such as death benefit, premium, beneficiary, and insurance age. Your insurance age could be your actual age or the closest age determined by the life insurance company.
- Coverage details: The coverage details section of a life insurance contract provides detailed information about your policy, such as how much you'll pay for premiums, when those payments are due, penalties for late payments, and who should receive your policy's death benefits. You could, for example, have a single primary beneficiary or a primary beneficiary with several contingent beneficiaries.
- Additional policy details: If you've chosen to add riders, there may be a separate section in your life insurance contract that covers them. Riders extend the coverage of your policy. Accelerated death benefit riders, long-term care riders, and critical illness riders are all common life insurance riders. If you need money to cover expenses related to a terminal illness, you can access your death benefit while still alive with these add-ons.
When you've decided that life insurance is something you need, you should carefully weigh your options. If you don't need lifetime coverage, you might prefer term life insurance over permanent life insurance. If you view life insurance as an investment, you may prefer permanent coverage.
In either case, it's critical to shop around for the best life insurance companies.
Interest insurable
It is your legal right to insure any property or event that may result in financial loss or legal liability for you. This is known as insurable interest.
Assume you live in your uncle's house and apply for homeowners insurance because you believe you will inherit it later. Insurers will reject your offer because you are not the owner of the home and thus do not stand to lose money in the event of a loss. It is not the house, car, or machinery that is insured when it comes to insurance. Rather, your policy applies to the monetary interest in that house, car, or machinery.
It is also the principle of insurable interest that allows married couples to take out insurance policies on each other's lives, on the assumption that one of them will suffer financially if the other dies. Insurable interest exists in some business arrangements, such as those between a creditor and a debtor, business partners, or employers and employees.
Insurable interests in life insurance contracts can include your spouse, children or grandchildren, a special needs adult who is also a dependent, or aging parents.
Subrogation Principle
Subrogation allows an insurer to sue a third party who has caused a loss to the insured and pursue all available means of recouping some of the money paid to the insured as a result of the loss.
For example, if you are injured in a car accident caused by another party's reckless driving, your insurer will compensate you. However, your insurance company may sue the reckless driver to recover the money.
The Good Faith Doctrine
All insurance contracts are based on the doctrine of uberrima fides, or absolute good faith. This doctrine emphasizes mutual trust between the insured and the insurer. Simply put, when you apply for insurance, it becomes your responsibility to provide the insurer with all relevant facts and information. Similarly, the insurer cannot conceal information about the insurance coverage being sold.
- Disclosure Obligation You are required by law to disclose any information that may influence the insurer's decision to enter into the insurance contract. Previous losses and claims under other policies, insurance coverage that has been declined in the past, the existence of other insurance contracts, and full facts and descriptions about the property or event to be insured must all be disclosed. These are known as material facts. Your insurer will decide whether to insure you and how much to charge based on these material facts. In life insurance, for example, your smoking habit is an important material fact for the insurer. As a result of your smoking habits, your insurance company may decide to charge a significantly higher premium.
- Warranty and representations Most insurances require you to sign a declaration at the end of the application form, stating that the answers to the questions on the application form, as well as other personal statements and questionnaires, are true and complete. As a result, when applying for fire insurance, for example, you should ensure that the information you provide about your building's type of construction or the nature of its use is technically correct.
These statements may be either representations or warranties, depending on their nature.
1) Representations: These are the written statements you make on your application form to the insurance company that represent the proposed risk. For example, on a life insurance application form, information about your age, family history, occupation, and so on are all representations that should be accurate in every way. Only when you give false information (for example, your age) in important statements do you violate representations. However, depending on the type of misrepresentation, the contract may or may not be void.
2) Warranties: Insurance contracts have different warranties than regular commercial contracts. They are imposed by the insurer to ensure that the risk does not increase throughout the policy. In the case of auto insurance, for example, if you lend your car to a friend who does not have a license and that friend is involved in an accident, your insurer may consider it a breach of warranty because it was not informed about the change. As a result, your claim may be denied.
As previously stated, insurance operates on the basis of mutual trust. It is your responsibility to provide your insurer with all relevant information. A breach of the principle of utmost good faith occurs when you, whether intentionally or unintentionally, fail to disclose these critical facts. Non-disclosure can be classified into two types:
- Innocent non-disclosure refers to failing to provide information about which you were unaware.
- Deliberate non-disclosure refers to intentionally providing incorrect material information.
Assume you are unaware that your grandfather died of cancer and, as a result, did not disclose this material fact in the family history questionnaire when applying for life insurance; this is an example of innocent non-disclosure. If, on the other hand, you were aware of this material fact and purposefully withheld it from the insurer, you are guilty of fraudulent non-disclosure.
When you provide false information with the intent to deceive, your insurance contract is voided.
- Your insurance company will not pay the claim if this deliberate breach was discovered at the time of the claim.
- If the insurer deems the breach to be minor but significant to the risk, it may choose to punish you by collecting additional premiums.
- In the case of an innocent breach that is unrelated to the risk, the insurer may choose to disregard the breach as if it never happened.
Other Policy Considerations
The Adhesion Doctrine According to the doctrine of adhesion, you must accept the entire insurance contract, including all of its terms and conditions, without bargaining. Because the insured has no way of changing the terms of the contract, any ambiguities in the contract will be interpreted in their favor.
Waiver and Estoppel Principle A waiver is the willing surrender of a known right. Estoppel bars a person from asserting those rights because they have acted in such a way that they have demonstrated a lack of interest in preserving those rights. Assume you omitted some information on the insurance proposal form. Your insurer does not ask for this information before issuing the insurance policy. This is a release. When a claim arises in the future, your insurer cannot challenge the contract on the basis of non-disclosure. This is known as estoppel. As a result, your insurer will be required to pay the claim.
Endorsements are typically used to change the terms of insurance contracts. They could also be issued to add specific policy conditions.
The sharing of insurance by two or more insurance companies in an agreed-upon proportion is referred to as co-insurance. The risk of insuring a large shopping mall, for example, is extremely high. As a result, the insurance company may decide to involve two or more insurers in order to share the risk. You and your insurance company may also have coinsurance. This is a common provision in medical insurance, in which you and the insurance company agree to split the covered costs in the ratio of 20:80. As a result, your insurer will pay 80% of the covered loss during the claim, while you will pay the remaining 20%.
When your insurer "sells" some of your coverage to another insurance company, this is referred to as reinsurance. Assume you are a famous rock star who wants to insure your voice for $50 million. The Insurance Company A has accepted your offer. However, because Insurance Company A is unable to retain the entire risk, it transfers a portion of it—say, $40 million—to Insurance Company B. If you lose your singing voice, insurer A will pay you $50 million ($10 million + $40 million), with insurer B contributing the reinsured amount ($40 million) to insurer A. This is referred to as reinsurance. Reinsurance is generally practiced to a much greater extent by general insurers than by life insurers.
In conclusion
When applying for insurance, you will discover a vast array of insurance products on the market. If you have an insurance advisor or broker, they can shop around for you to ensure that you are getting the best insurance coverage for the money. Nonetheless, a basic understanding of insurance contracts can go a long way toward ensuring that your advisor's recommendations are sound.
Furthermore, your claim may be canceled because you failed to provide certain information requested by your insurance company. In this case, ignorance and carelessness can cost you dearly. Instead of signing without reading the fine print, go over your insurer's policy features. You'll be able to ensure that the insurance product you're signing up for will cover you when you need it the most if you understand what you're reading.
Principles of insurance contract
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| Principles of insurance contract |
- Complete Trust
- Interest insurable
- The Proximate Cause
- Indemnity
- Subrogation
- Contribution
- Loss Reduction
Each item is briefly explained below, including how it may relate to a potential injury lawsuit. These principles can be interpreted in various ways. If you believe one of these principles has been violated, or if your insurance claim has been wrongfully denied, we recommend that you use our free case evaluation to determine whether hiring a lawyer is a good idea for you.
The Utmost Good Faith Principle
In an insurance contract, both the insured (policy holder) and the insurer (the company) must act in good faith toward one another.
The insurer and the insured must provide clear and concise information about the contract's terms and conditions.
Because the nature of the service is for the insurance company to provide a certain level of security and solidarity to the insured person's life, this is a very basic and primary principle of insurance contracts. However, the insurance company must also keep an eye out for anyone attempting to con them out of free money. As a result, each party is expected to act in good faith toward the other.
If the insurance company provides you with falsified or misrepresented information, they are liable if the misrepresentation or falsification causes you to lose money. If you have misrepresented information about the subject matter or your personal history, the insurance company's liability is null and void (revoked).
See how a Facebook post can derail a personal injury case.
The Insurable Interest Principle
Insurable interest simply means that the contract's subject matter must provide some financial gain to the insured (or policyholder) by existing and would result in a financial loss if damaged, destroyed, stolen, or lost.
- The insured must have an insurable interest in the insurance contract's subject matter.
- The subject's owner is said to have an insurable interest until he or she is no longer the owner.
This is usually a no-brainer in auto insurance, but it can cause problems when the person driving the vehicle does not own it. For example, if you are hit by someone who is not on the vehicle's insurance policy, do you file a claim with the owner's insurance company or the driver's insurance company? This is a simple but critical requirement for the existence of an insurance contract.
The Indemnity Principle
- Indemnity is a guarantee that the insured will be returned to the position he or she was in prior to the uncertain incident that caused the insured's loss. The insured is compensated by the insurer (provider) (policyholder).
- The insurance company promises to compensate the policyholder for the amount of the loss up to the contract limit.
Essentially, this is the most important part of the contract for the insurance policyholder because it states that she or he has the right to be compensated or, in other words, indemnified for his or her loss.
The amount of compensation is proportional to the amount of loss suffered. The insurance company will pay up to the amount of the incurred loss or the agreed-upon insured amount, whichever is less. For example, suppose your car is insured for $10,000 but the damage is only $3,000. You receive $3,000 rather than the full amount.
When the incident that caused the loss does not occur within the time frame specified in the contract or from the specific agreed-upon causes of loss, compensation is not paid (as you will see in The Principle of Proximate Cause). Insurance contracts are created solely to provide protection against unexpected events, not to profit from a loss. As a result, the insured is protected from losses not only by the principle of indemnity, but also by stipulations that prevent him or her from being able to scam and profit.
The Contribution Principle
- Contribution creates a corollary among all insurance contracts involved in the same incident or subject.
- Contribution allows the insured to seek indemnity from all insurance contracts involved in his or her claim to the extent of actual loss.
Assume you have taken out two insurance contracts on your used Lamborghini to ensure that you are fully covered in any situation. Assume you have an Allstate policy that covers $30,000 in property damage and a State Farm policy that covers $50,000 in property damage. If you are involved in an accident that causes $50,000 in damage to your vehicle. Then Allstate will cover about $19,000, and State Farm will cover $31,000.
This is the contribution principle. Each policy you have on the same subject pays their proportion of the policyholder's loss. It is an extension of the indemnity principle that allows for proportional liability for all insurance coverage on the same subject matter.
The Subrogation Principle
This principle can be a little perplexing, but the example should help clarify it. Subrogation is the process of replacing one creditor (the insurance company) with another (another insurance company representing the person responsible for the loss).
- After the insured (policyholder) has been compensated for the loss on an insured piece of property, ownership of that property passes to the insurer.
Assume you are in a car accident caused by a third party and file a claim with your insurance company to cover the damages to your car as well as your medical expenses. Your insurance company will take ownership of your car and medical expenses in order to intervene and file a claim or lawsuit against the person who caused the accident (i.e. the person who should have paid for your losses).
Subrogation can only benefit the insurance company if it recovers the money it paid to its policyholder as well as the costs of obtaining this money. Anything extra paid by a third party is returned to the policyholder. Assume your insurance company filed a lawsuit against the negligent third party after it had already compensated you for the full amount of your damages. If their lawsuit recovers more money from the negligent third party than they paid you, they will use the difference to cover court costs, with the remainder going to you.
The Proximate Cause Principle
- The loss of insured property can be caused by more than one incident, even if they occur in quick succession.
- Some, but not all, causes of loss may be insured against.
- When a property is not insured against all causes, the closest cause must be determined.
- If the proximate cause is one for which the property is insured, the insurer is obligated to pay compensation. If it is not a cause for which the property is insured, the insurer is not required to pay.
When purchasing insurance policies, you will almost certainly go through a process in which you select which situations you and your property will be covered for and which will not. This is where you decide which proximate causes will be covered. If you are involved in an incident, the proximate cause must be investigated so that the insurance company can confirm that you are covered for the incident.
This can lead to disagreements if you have an incident that you thought was covered but your insurance provider says it isn't. Insurance companies want to make sure they are protecting themselves, but they can also use this to avoid liability in some situations. You may need to hire a lawyer to represent you in this dispute.
The Loss Minimization Principle
This is our final and most basic principle for creating an insurance contract.
- It is the insured's responsibility to take all precautions to minimize the loss on the insured property in the event of an unforeseeable event.
Insurance contracts should not be used to get free stuff whenever something bad happens. As a result, the insured bears some responsibility to take all reasonable steps to minimize property loss. This principle is debatable, so consult a lawyer if you believe you are being unfairly judged based on it.
That, ladies and gentlemen, is what constitutes an insurance contract.
If you believe you have been the victim of a breach of contract or that your provider has failed to fulfill their obligations to you, please contact us for a free consultation. We can assist you in deciphering insurance company jargon and combating their history of unfair treatment of policyholders.
Justin McMinn, a partner at McMinn Law Firm, is the author. Justin McMinn represents clients in personal injury cases in Austin and the surrounding areas. He focuses on cases involving injuries in automobile accidents, such as car, truck, and bicycle accidents. Since 2007, he has worked as a personal injury accident lawyer at McMinn Law Firm.
Elements of insurance contract
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| Elements of insurance contract |
What Do Insurance Contract Elements Mean?
Elements of an Insurance Contract Explained
- Offer and Acceptance - This refers to making an offer and then having it accepted by the other party. When you meet this legal requirement, you are declaring that all negotiations have concluded and you have reached an agreement. This is also referred to as a "agreement" or a "meeting of the minds." In the insurance context, this means you applied to the insurance company, they accepted it, and you agreed to the policy terms they offered.
- Consideration - A reasonable exchange of value. This requirement is not met by a contract in which one party receives everything while the other party contributes nothing. In the case of an insurance policy, you are paying premiums while they are promising to pay claims in the future.
- Legal Capacity - To meet this requirement, each contract party must have the legal capacity or competence to enter into a contract. This means you must meet certain requirements, such as being of legal age in your jurisdiction and having the mental capacity to understand what you are signing and agreeing to.
- Legal Purpose - Obviously, the courts will not enforce an illegal contract. A contract for the provision of illegal services, for example, would not be a legal or valid contract because the course would not enforce it.
- Indemnity.
- Interest that is insurable.
- Absolute Trust.
- Subrogation.
- Nomination and assignment
- Warranties.
- The Proximate Cause
- Premium refund.
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