Topic 9. 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 Liability Maximum amount payable Life Policies Face amount of policy Health Policies Lifetime maximum Internal limits (or Sub-limits) on specific services Property Policies Specific limits such as Actual Cash Value, Replacement Value, Cost to Repair or Replace, Face Value of Insurance Liability Policies Amount payable per claim

Declarations Retained Losses Some losses 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. We will pay… The company agrees to pay… The most we will pay… We will not pay… Variation in Insuring Clauses Simple, such as in life insurance Several, one for each major type of coverage, such as in packaged policies Covered Perils (Causes of Loss) Open versus named perils Exposures to Loss Ex. Covered Property, Property Not Covered

Insuring Agreement Open Perils versus Named-Perils Named Perils Causes of Loss – Basic or Broad Forms 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 … Burden of proof is on the insured. Open Perils Causes of Loss – Special Form Formerly “all risk” 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. Burden of proof is on the insurer.

Insuring Agreement Exposures to Loss The exposures to be covered are defined in the insuring agreement Liability  Legally obligated to pay for damages …  The right and duty to defend…  Provide a defense at our expenses by counsel of our choice… Property  Direct loss Business income insurance  Loss of income resulting from direct losses to covered property (or insured premises) 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 Due to insurability 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 “We will not pay for loss or damage caused directly or indirectly by …” War, Nuclear Hazard, Earth Movement, Flood,

Exclusions and Exceptions Types of Exclusions (Limitations) Excluded Property “Covered Property does not include …” Due to availability of better coverage  Homeowners policy does not cover for automobile although automobile is owned property of the homeowner Excluded Losses “We will not pay for loss or damage caused directly or indirectly by …”  Ordinance or Law, Utility Services “We do not provide liability coverage for any insured who intentionally causes bodily injury or property damage.”

Conditions This section of policy enumerates the duties of the parties to the contract and define the terms used. Insurance contracts are “conditional contracts.” 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 …” “Upon receipt … of proof of death of the insured.” “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 To force insureds to perform the way they would if they did not have insurance. “Cooperate with us in the investigation or settlement of the claim” “The insured shall cooperate with the Company, …” Protection of Property After Loss To reduce the loss as much as possible “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. Riders are used with life/health policies Endorsements are used with property/casualty policies