Topic 11. Insurance Policy Provisions BUS 200 Introduction to Risk Management and Insurance Jin Park

Overview Declarations Insuring Agreement Exclusions Conditions Endorsements and Riders

Declarations Insurer and producer Policy number Insured Name Mailing address Description (Type) of loss exposure Period of Coverage (Policy period) Premiums for each coverage part and total premium Limit of Liability (or Limit of Insurance) Deductible Coinsurance

Declarations Period of Coverage Life/Health Policies entire life a specified period of years to a specified age Property/Liability Policies typically for one year or less sometimes more than a year

Declarations Limit of Insurance (or Liability) It is the maximum amount payable by insurer Life Policies  Face amount of policy Health Policies  Lifetime maximum  Internal limits (or Sub-limits) on specific services Property Policies  Actual cash value  Replacement value  Cost to repair or replace  Face amount of insurance Liability Policies  payable per claim  payable per claimant  payable per policy period  payable per event

Declarations Retained Losses (Insured’s retention) Some losses are left with insured to lessen moral hazard Deductible Coinsurance in property insurance Copayment and Coinsurance in health insurance Waiting periods in disability insurance (aka: Elimination period)  A few days to two weeks Waiting periods in business income insurance  72 hours after a direct physical loss or damage to the covered property

Insuring Agreement A general statement of the promises the insurer makes to the insured. (See page 577, 579, 580, …) We will pay… The company agrees to pay… The most we will pay… We will not pay… Perils covered by the policy (Causes of loss) Open versus named perils Exposures to Loss Exposures covered Exposures not covered

Insuring Agreement Variation in Insuring Agreement life insurance policy – simple (see Page 614) …will pay the proceeds to the beneficiary when due proof is received that the insured died before this policy terminated. Property-Liability Insurance policy – several insuring agreements (see previous slide for examples)

Insuring Agreement Perils Covered by the policy Named Perils A policy covers only losses caused by the perils listed (or named) in the policy  Fire, Lightening, Windstorm and Hail, Explosion, Vandalism, Riot or Civil Commotion, Aircrafts and Vehicles, Smoke, Falling Objects … The burden of proof is on the insured. Open Perils Formerly known as “all risk” policy. A policy covers losses caused by all perils except those excluded. Unanticipated or unknown perils are covered, if not excluded In life insurance policy, all perils are covered except for suicide during the first year or the first two years. “Dwelling” under a special form of homeowner policy is covered by the open peril basis. Burden of proof is on the insurer.

Insuring Agreement Exposures to Loss Life Death Liability Legally obligated to pay for damages … Liability judgments or settlements against the insured including legal defense costs Property Direct loss Business income insurance Loss of income resulting from direct losses to covered property (or insured premises) cf: Business income from dependent properties (aka: Contingent business interruption coverage)  Loss of income resulting from a loss at a premises not owned by the insured but on which the insured depends for business operations

Exclusions and Exceptions Reasons for Exclusions (Limitations) Avoid Catastrophic Losses War, Nuclear Hazard, Earth Movement, Flood, Power Failure Exclude Intentional Losses To make loss more predicable and to reduce moral hazard  “In the event of intentional loss, no insured is entitled to coverage.”  Suicide clause in life insurance policy Avoid Duplicate Coverage To support principle of indemnity and to reduce moral hazard Other insurance provisions Reduce Adverse Selection and Moral Hazard Pre-existing conditions in health insurance Cosmetic services and surgery in health insurance To induce insureds to purchase more appropriate policy Some valuable personal items (fur coat, jewelry, business personal property on homeowners policy is limited.)

Exclusions and Exceptions Types of Exclusions (Limitations) Excluded Locations Auto insurance – United States and Canada only Property off premises is covered with limitations. Excluded Perils War, Nuclear Hazard, Earth Movement, Flood, etc Excluded Property “Covered Property does not include …” Due to availability of better coverage  Automobile Excluded Losses “We will not pay for loss or damage caused directly or indirectly by …” “We do not provide liability coverage for any insured who intentionally causes bodily injury or property damage.”

Conditions Insurance contracts are “conditional contracts.” This section of policy enumerates the duties of the parties to the contract and define the terms used in the policy. Notice and Proof of Loss Suspension of Coverage Cooperation of the Insured Protection of Property After Loss Examination

Conditions Notice and Proof of Loss “Give immediate notice to us or our agent …” “Written proof of notice must be furnished …” The insurer may deny claims (or reduce loss payments) if notice of loss is not made in a reasonable time. Suspension of Coverage Life insurance Suspension of coverage for those in military service during the wartime Personal auto insurance If auto is used for business purposes Homeowners and Commercial Property insurance No coverage or reduced coverage for home (or property) that has been vacant for more than certain days.

Conditions Cooperation of the Insured “Cooperate with us in the investigation or settlement of the claim” “The insured shall cooperate with the Company, …” Protection of Property After Loss “Take all reasonable steps to protect the covered property from further damage.” Examination Disability Insurance Periodical physical examination Property Insurance “Send us a signed, sworn proof of loss containing the information that we request to investigate the claim.” “permit us to inspect the property proving the loss or damage and examine your books and records.”

Endorsements and Riders A rider or endorsement makes a change in the contract to which it is attached. It may increase or decrease the coverage, change the premium, correct a statement, or make any number of changes.