Lecture Five: Analysis Insurance Contracts

Learning Objectives Identify the basic parts of any insurance contract Identify the characteristics of an insurance contract Identify the basic parts of any insurance contract Explain the meaning of an “insured” in an insurance contract Explain how coinsurance works in a property insurance contract Explain how coinsurance works in a health insurance contract Describe the common types of deductibles that appear in insurance contracts Explain what happens when more than one insurance contract covers the same loss

Main Contents An Insurance Contract and Its Characteristics Basic Parts of An Insurance Contract Definition of the “Insured” Endorsements and Riders Deductibles Coinsurance Other Insurance Provisions

What’s an Insurance Contract?

Definition of an insurance contract An insurance contract is a legally binding agreement creating rights and duties for the two parties of the insurer and the insured. The insured should pay premium to the insurer, the insurer should pay the loss of the insured under the agreement. 我国《保险法》第十条（2002年10月28日通过）规定：保险合同是投保人与保险人约定保险权利与义务关系的协议。投保人是指与保险人订立保险合同并按照保险合同负有支付保险费义务的人；保险人是指与投保人订立保险合同，并承担赔偿或者给付责任的保险公司。

Definition of an insurance contract It is a legally valid agreement between two parties (the insurer and the insured) On one hand, an insurance contract has common features with other contracts; on the other, it has more characteristics

Characteristics of an Insurance Contract Bilateral Contract Aleatory Contract Indemnity Contract Conditional contract Personal contract Adhesion contract

Bilateral contract (双务性） Some contracts are Unilateral(双务性）, that is, only one party makes a enforceable promise, the other party do not need. Most commercial contracts are Bilateral (单务性）, that is each party makes a legally enforceable promise to the other party. If one party fails to perform, the other party can insist on performance or can sue for damages because of the breach of contract. How about insurance contract Unilateral or Bilateral ???

an insurance contract is a Bilateral Contract, that is both parties should make enforceable promises Some scholars (Wei Huanlin, Sun Qixiang, etc.) The insured should pay the premiums to the insurer, the insurer should pay the loss under the contract. an insurance contract is a Unilateral Contract. (text P39)

Aleatory Contract（射幸性） An insurance contracts is aleatory. This means the parties to the contract know in advance the value they exchange will be unequal. The insured pays the premium, and collects a large sum if a large loss occurs or collect nothing if no loss occurs. The opposite is true to the insurer. In most instances, it collects a premium and pays nothing. In a few cases, it collects a small premium and pays a large amount. The aleatory feature of insurance policies differs from other business contract.

Indemnity Contract（补偿性） indemnity means the insured should be in the same financial condition as before the loss. an insurance contract provide compensation for an insured’s losses. The insured, however, should not profit from an insurance transaction. Insurers enforce the principle of indemnity through the insurable interest requirement, actual cash value settlements, and the operation of subrogation clauses. This mainly is used to property insurance. Life insurance contract can not follow the principle.

Conditional contract(条件性） An insurance contract is conditional contract . This means the contract can enforce only if all the fact meets the conditions stipulated in the contract. Common policy conditions include notifying the insurer if a loss occurs, protecting the property after a loss, filing a proof of loss with the insurer, and cooperating with the insurer in the event of a liability suit. Only the insured do as the contract required, he or she can get the loss compensation, otherwise will not. (examples)

Personal contract（个人性） An insurance contract is a personal contract. This means the loss of the insured subjects is the loss for the insured himself/or herself. Because each person has his or her characteristics based on her own conditions. The insurance contract , the premium is decided on his or her conditions, no other substitute. The insured can transfer his or her insured subject, but the insurance contract can not transfer automatically. Only if there are stipulations in the contract. (examples)

Adhesion contract（附和性） An insurance contract is adhesion contract. That is the insurer list out the main contents and conditions of the contract, the insured in most case can only follow. Because the unequal knowledge and unequal bargaining power between the insurers and the insured, the insurers has more power, this give the insurers a significant advantage over the insured. (example：霸王条款) The insurance law emphasize that the language and conditions in an insurance contract should be easy to understand, should not be ambiguous. (examples) Not all the insurance contract are adhesion. Some special contract can make based on the two parities’ agreement. (examples)

Basic Parts of An Insurance Contract Although insurance contracts are not identical, they generally contain the following parts: Declarations Definitions Insuring agreement Exclusion Conditions Miscellaneous provisions

Declarations Declaration is the first part of an insurance contract. Providing information about the property or activity to be insured Declaration is used for underwriting and rating purposes.

Declarations In property insurance, the declarations contain such information as the following: the identification of the insurer name of the insured location of the property period of protection amount of insurance amount of premium size of the deductible other relevant information

Declarations In life insurance, the declarations contain such information as the following: the insured’s name age gender premium amount issue date policy number other relevant information

Definitions Insurance contracts typically contain such key word as “ We”, “our”, “us”, referring to the insurer ; “you”, “your” , referring to the insured”. ( using quotation marks).

Insuring Agreement Insuring Agreement is the heart of an insurance contract. Insuring Agreement summarizes the major promises of the insurer. That’s the insurer agrees to do certain things under the contract. There are two basic forms of an insuring agreement in property and liability insurance:

Insuring Agreement Named perils coverage: only those perils specifically named in the policy are covered. If the peril is not named, it is not covered. “all-risks” coverage: an open policy, under which all losses are covered except those losses specifically excluded. If the loss is not excluded, then it is covered.

Exclusions Exclusions are another basic part of any insurance contract. There are three major types of exclusions as follows: excluded peril excluded losses excluded property Reasons for exclusions: some perils considered uninsurable presence of extraordinary hazards coverage provided by other contracts moral hazard problems coverage not needed by the typical insured

Conditions Conditions sections is another important part of any insurance contract. Conditions section impose certain duties on the insured. If the policy conditions are not met, the insure can refuse to pay the claim. Common policy conditions include:

Conditions notifying the insurer if a loss occurs protecting the property after a loss preparing an inventory of damaged personal property cooperating with the insurer in a liability suit.

Miscellaneous Provisions Insurance contracts also contain a number of miscellaneous provisions. In property and liability insurance, some miscellaneous provisions refer to cancellation, subrogation, requirements if a loss occurs, assignment of the policy, and other-insurance provisions In life and health insurance, typical provision include the grace period, reinstatement of a lapsed policy, and misstatement of age.

我国《保险法》规定保险合同应该包括下列各项内容 保险人名称和住所； 投保人，被保险人名称和住所，以及人身保险的受益人的名称和住所 保险标的； 保险责任和责任免除； 保险期间和保险责任开始时间； 保险价值； 保险金额； 保险费以及支付办法； 保险金赔偿或者给付办法， 违约责任和争议处理； 订立合同的年，月，日。

The forms of an insurance contract There are four kinds of insurance contract forms as the following: Application Form Binder/slip Premium receipt Insurance Policy

Definition of the “insured” In an insurance contract, the insured is typically defined under the policy: only one person (most insurance) named insured ( husband and spouse) more than one person (in homeowners policy, parents, any person under 21, full time students under 24)

Endorsements and Riders In insurance contracts frequently contain endorsements and riders: In property and liability insurance, an endorsement or rider is a provision/document that add to, deletes from or modifies the original provision/policy. An endorsement attached to a contract generally takes precedence over any conflicting terms, unless it is contrary to a law or regulation.

Deductibles A deductible is another common policy provision A deductible is a provision by which a specified amount is subtracted from the total loss payment Deductibles typically are found in property, health, and auto insurance contracts. Deductibles are not used in life insurance or in a personal liability insurance

Deductibles purpose of deductibles To eliminate small claims To reduce premiums To reduce moral and morale hazard

Deductibles Deductibles in property insurance Straight deductible: Aggregate deductible Deductibles in health insurance Calendar-year deductible Corridor deductible Elimination (Waiting) period

Coinsurance nature of coinsurance Purpose of coinsurance

Nature of Coinsurance Coinsurance is a contractual provision that often appears in property insurance contracts. It is especially true of commercial property insurance contracts. A coinsurance clause in a property insurance contract requires the insured to insure the property for a stated percentage of its insurable value.

Nature of Coinsurance The coinsurance formula is as follows:

Purpose of Coinsurance The fundamental purpose of coinsurance is to achieve equity in rating. Examples： the exhibits on PP51 In property insurance: 以实际损失为限 以可保利益为限 以保险金额为限

Coinsurance in Health Insurance Health insurance contracts frequently contain a coinsurance clause Major medical policies typically have a coinsurance provision that requires the insured to pay a certain percentage ( 20%-25%) of covered medical expenses in excess of the deductible. The purposes are (1) to reduce premiums and (2) to prevent overutilization of policy benefits.

Other Insurance Provisions Pro Rata Liability Contribution by Equal Shares Primary and Excess Insurance Examples： the exhibits on PP54

Changes and termination of insurance contract The changes of insurance contract the changes of the subject the changes of the contents the changes of effects Termination of insurance contract finished the performance expiration against the terms of the contract

Disputes settlement The principle of explanation Techniques to dealing with contract disputes negotiation（协商） conciliation（调解） arbitration （仲裁） legal action （诉讼）

Summary An insurance contract is a legally binding agreement creating rights and duties for the two parties of the insurer and the insured. The insurance contract has its own characteristics: Bilateral contract Aleatory Contract Indemnity Contract Conditional contract Adhesion contract Personal contract Insurance interests are essential in both underwriting and indemnity stages.

Summary In any insurance contract, it includes both the main provisions and additional provisions. They both are forceful.

Review questions Describe the basic parts of an insurance contract. Identify the major types of exclusions typically found in insurance contracts. Why are exclusions used by insurers. How can an insurance contract cover other persons eve though they are not specifically named in the policy? Why do deductibles appear in insurance contracts? Identify some common deductibles that are found in insurance contract?