2-F COMMON POLICY PROVISIONS Flashcards
Common Policy Provisions
● Insurance policies are standardized forms, most of which are created by ISO or AAIS
● Provisions within the policy establish terms of the agreement
What are ISO and AAIS?
● National organizations
● Produce standardized insurance forms for insurers to use
● Collect statistical data
● Provide rating information
● Work with state regulators on behalf of subscribing insurers
Cancellation and Nonrenewal Condition
● Sets rights and duties of both insurer and insured if either cancels
● Policyholder can cancel anytime with notice
● Insurer’s right to cancel is subject to state insurance laws
● Generally, insurer must provide written notice for cancellation or nonrenewal
● Insurer can cancel with fewer days’ notice for non-payment of premiums
Unearned Premiums
● Policyholder pays premiums before receiving full coverage
● If policy is canceled early, insurer must pay back any money it received for
coverage it never gave
● Insurer counts unearned premiums among liabilities
Unearned Premiums Example
Suppose you make an annual payment of $1,200 for your homeowners insurance. If your insurer cancels the coverage one month after you’ve paid your annual premium, they would then have to refund you $1,100 for the 11 months of coverage you paid for but never received.
Changing a Policy
Policy changes added by endorsement and agreed upon by both insurer and insured
Liberalization Clause
If insurer broadens policy coverage in course of business, policies already issued must include this increase if the change:
● Occurred during the policy period (or even shortly before policy period for some policies)
● Did not raise the policy premium
Representations Condition
● Policy coverage is based on information the insured provided
● If insured gives false information, the insurer can void the policy
Concealment, Misrepresentation, and Fraud
● Protects the insurer from the dishonesty of the insured
● Insured cannot omit or misrepresent material facts
Concealment, Misrepresentation, and Fraud Example
If the insured were to hide certain facts about the services offered by his business (failing to mention that the business serves alcohol, for instance), this would count as concealment.
Similarly, if the insured were to tell his insurer that he doesn’t smoke, when in fact he does, the insurer could deny health insurance coverage if the insured were to get lung cancer from smoking.
Policy Rescission
● Rescinding a policy means declaring that it was never a valid agreement
● Can only be done under certain circumstances, such as material, intentional, or
fraudulent misrepresentation
An insurer can rescind a policy if the policyholder:
- Lied or concealed information in the application
- Made a mistake in the application that significantly affects the insurer
- Made a fraudulent claim to get benefits
Assignment Provision
Policy is non-transferable unless insurer agrees
Exception: death
If insured dies, coverage transfers to the decedent’s legal representative
Additional Insured
Person or organization that is added to the policy at the First Named Insured’s request and who benefits from policy, but may not make changes
Additional Insured
Example
The policyholder of a personal auto policy may add a family member to the policy by name, and the policy may also state that coverage is provided to any person using the insured vehicle with the policyholder’s permission.
Other Insurance / Apportionment
● Guidelines for settling claims when more than one policy covers the damages
● Enforces principle of indemnity by keeping people from “double recovering” for
a loss
Primary:
policy pays up to the limit, regardless of presence of another policy
Excess:
policy only pays once the primary policy’s limits have been exhausted
Contribution of Equal Shares
● Each policy pays an equal share of the loss up to lowest policy limit
● Process repeats until loss is paid in full or all policy limits have been reached
Pro Rata
Policies split the loss, based on percentage of coverage each policy provides
Pro Rata Example
Say Annie’s dwelling policy has a limit of $100,000 and her husband takes out another $50,000 policy. The total amount of insurance covering the property is $150,000.
Annie’s policy makes up 2/3 of the insurance on the property, since $100,000 is 2/3 of $150,000.
So, if a loss occurs, Annie’s policy will pay 2/3 of the loss, and the other policy will pay the other third.
Nonconcurrency
The situation in which two or more policies covering the same risk have different inception and expiration dates
Overinsurance
The amount of insurance covering a risk which exceeds the insurable value of that risk
● Insurer will only pay up to the insurable value
● Fraudulent intent voids the contract
Restoration / Non-reduction of Limits
Common options:
● Restore limits to original level
● Loss does not reduce limits at all
● Total loss payout ends policy coverage and excess premiums returned to insured
Legal Action Against an Insurer
Sets requirements the insured must meet before suing the insurer:
● Insured must comply with all policy obligations
● Insurer is not liable for damages above policy limit
Legal Action Against an Insurer
Liability Policies:
● No one can join the insurer in lawsuit against insured
● No one can sue insurer until insurer’s obligation is determined
Insured’s Duties in the Event of a Loss:
● Notify the police if the loss may have involved a crime
● Notify the insurer about what property was involved, and the circumstances
surrounding the loss
● Submit a description o f how, where, and when the loss occurred
● Try to prevent further damages, a nd keep track of expenses incurred doing this
● Give insurer a list of damaged property (Commercial policies may ask for a list
of damaged and undamaged inventory, too)
● Submit to examination under oath
● Sign a sworn proof of loss for the insurer, if requested
● Let the insurer appraise damages to covered properties by inspecting them (including any company records or books when dealing with commercial
policies)
● Cooperate in all investigations and settlement procedures
Exclusions serve many purposes:
● Remove coverage for uninsurable losses
● Manage moral and morale hazards
● Eliminate duplication of coverages
● Remove coverages that typical consumers don’t need
● Remove coverages that need special treatment
● Lower premiums
Common Exclusions
● Intentional acts ● Neglect ● Normal wear and tear, or deterioration ● Ordinance or law (laws regulating the use, construction, repair, or demolition of a structure) ● Government or civil confiscation ● Off-premises power failure ● War ● Nuclear events
Covered in auto policies, but excluded in other property policies
● Earth movement (earthquakes, mudslides, landslides, etc.)
● Flood or water damage from water below the ground, above ground, or back
up through sewers or drains
Vacancy Condition
● Defines “vacancy” for the purpose of coverage
● Specifies a time period (typically 60 days) and a condition, such as a dwelling
that is unoccupied or a company that is not open for business
● Commercial buildings may be deemed vacant if less than 31% of the available
square footage is occupied for the set time period.
