Insurance Policy Basics
Understanding an insurance policy of any type can present challenges to all but the most trained insurance professionals. An insurance policy is, after all, a legally binding contract between an insurance company and an insurance consumer, written in language that has been the source of much legal debate.
The seemingly complex nature of insurance policies makes it difficult for insurance consumers to be fully understand the insurance purchases they have made. It can also be difficult to understand the respective responsibilities of the insurer and the insured under the insurance contract. Yet, insurance consumers can gain a practical understanding of the basic insurance contract when realizing that it contains only four fundamental components: the declarations page, the insuring agreement, exclusions and conditions.
To begin, the declarations page names the insured person or persons who will receive policy benefits should a covered loss occur. It identifies the property or risk covered by the policy and outlines the policy limits for types of coverage purchased. And, it states the premium amount, any discounts that might apply and the time period that the policy will be in force.
The next part of the contract is the insuring agreement. This document sets forth what is actually covered and reviews the insurance company’s responsibilities to the insured. These responsibilities usually fall into three categories: payment of expenses, providing services or defending the insured should a lawsuit ensue. The insuring agreement can take the form of “named-perils coverage”, which outlines only the specific perils covered by the policy. Any type of loss not named is not covered. Or the insuring agreement can be “all-risk coverage”, which covers all losses not specifically excluded while setting forth exclusions with specificity.
The insurance contract then lists specific exclusions that take away coverage. These exclusions generally fall into three categories: excluded losses, excluded causes of loss, and excluded property. In the example of a homeowners policy an excluded loss would be normal wear and tear, an excluded cause of loss would be flood or earthquake, and an excluded property would be a pet or automobile.
Lastly, the insurance contract lists conditions that either qualify or limit the insurance company’s promise to pay or perform according to the policy. If these conditions are not met, a loss can be denied. Some common policy conditions include reporting losses in a timely manner, mitigating further damages, and cooperating with the company’s claim investigation.
Once an insurance consumer recognizes the four fundamental components of a basic insurance contract, he or she can better manage the risks by understanding the insurance purchases made. The consumer will also know in advance what the insurance company will and will not do, taking much of the mystery and anxiety out of making a claim for an insured loss.