Analysis of Insurance Contract

Learning Objectives:
 Identify the basic parts of any insurance
contract
 Describe the common types of deductibles that
appear in insurance contracts
 Explain how coinsurance works in a property
insurance contract.
 Explain what happens when more than one
insurance contract covers the same loss.

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 Basic Parts of an Insurance Contract
 Declarations
 Definitions
 Insuring Agreement
 Exclusions
 Conditions
 Miscellaneous Provisions

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 Basic Parts of an Insurance Contract

Declarations: are statements that provide information about

the property or activity to be insured.

It contains information concerning 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 (if any), and other
relevant information.

Definitions: Insurance contract typically contain a page or

section of definitions. Key words or phrases have quotation
marks (“ “) around them or are in boldface type. For
example the insurer is frequently referred to as “we,” “our”
or “us”. The insured is referred to as “you” and “your”

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 Basic Parts of an Insurance Contract

Insuring Agreement
The Insuring Agreement summarizes the major
promises of the insurer. The insurer, in other
words, agrees to do certain things, such as
paying losses from insured perils, providing
certain services.
There are two basic form of an insuring agreement
in property and liability insurance:
1. Named Perils Coverage
2. All-risk coverage (Open Perils Policy).

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 Basic Parts of an Insurance Contract

 Exclusion:

Exclusions

Excluded Peril Excluded Losses Excluded Property

 Excluded Perils: The Contract may exclude

certain perils, or causes of loss. Under the
homeowners policy, the perils of flood, earth
movement and nuclear radiation or
radioactive contamination are specifically
excluded.
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 Basic Parts of an Insurance Contract

Excluded Losses: Certain types of

losses may be excluded. For example,
in a homeowners policy, failure of an
insured to protect the property after a
loss occurs is excluded.
Excluded Property: The contract may
exclude or place limitations on the
coverage of certain property. For
example, in a homeowners policy,
certain types of personal property are
excluded, such as cars, animals etc.
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 Reasons for Exclusions
 Some perils considered uninsurable
(Example, most property and liability insurance
contracts exclude losses for potential catastrophic
events.)
 Presence of extraordinary hazards
 (Example, car is normally use not as a Taxicab)
 Coverage provided by other contracts
(Example, car is excluded under homeowner
policy coz it is covered under the Personal Auto
Policy)
 Moral hazard problems
 (Fraudulent claims could increase )
 Coverage not needed by typical insured
(Aircraft never covered under homeowner policy)
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 Basic Parts of an Insurance Contract

 Conditions
Conditions are provisions in the policy that qualify or place
limitations insured’s promise to perform. 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.
°Miscellaneous Provisions
Example, In property and liability insurance, Cancellation,
Subrogation, requirements if a loss occurs. In life and health
insurance, grace period and misstatement of age.

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 `Endorsements and Riders
The terms endorsements and riders are
often used interchangeably and the same
thing.
In property and liability insurance, an
endorsement is a written provision that
adds to , deletes from, or modifies the
provisions in the original contract.
In life and health insurance, a rider is a
document that amends or changes the
original policy

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 Deductibles

A deductible is a provision by which a

specified amount is subtracted from
the total loss payment that
otherwise would payable.
Purposes of Deductibles:
o To eliminate small claims

o To reduce premiums

o To reduce moral and morale hazard.

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 Deductibles in Property Insurance
 Straight Deductible: The insured must
pay a certain number of dollars of loss
before the insurer is required to make a
payment.
 Aggregate Deductible: is sometimes
used in commercial property insurance,
by which all covered losses during the
year are added together until they reach
a certain level.If total covered losses are
below the aggregate deductible, the
insurer pays nothing.

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 Deductibles in Health Insurance
 Calendar-year Deductible
 Corridor Deductible
 Elimination (waiting) Period

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ement,IIUC,DC
 Deductibles in Health Insurance
Calendar-year Deductible: is a type of aggregate
deductible that is found in basic medical
expense and major medical insurance
contracts.
If the once the deductible is satisfied during
the calendar year then no additional
deductibles are imposed on the insured.

Corridor Deductible: is a deductible that can be

used to integrate a basic medical expense plan
with a supplemental major medical expense
plan.
The corridor deductible applies only to eligible
medical expnse that are not covered by the
basic medical expense plan.
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 Deductibles in Health Insurance
 Elimination (waiting) Period: A
deductible can also be expressed as
an elimination period. An
elimination period is a stated period
of time at the beginning of a loss
during which no insurance benefits
are paid.

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 Coinsurance
 Nature of Coinsurance: A coinsurance
clause in a property insurance contract
requires the insured to insure the property for
a stated percentage of its insurable value. If
the coinsurance requirement is not met at the
time of loss, the insured must share in the loss
as a coinsurer.
Coinsurance Formula:
Amount
Amount of Insurance carried
× Loss = Of
Amount of Insurance Required Recovery

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 Nature of Coinsurance:

The amount can never exceed the

amount of the actual loss even
though the coinsurance formula
produces such a result.
The maximum amount paid for any
loss is limited to the face.

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