Chapter 10 - Analysis of Insurance Contracts

Question 1

Define Additional Insured

Answer 1

Person or party who is added to the named insured’s policy by an endorsement.

Question 2

Define Aggregate Deductible

Answer 2

Deductible in some property and health insurance contracts in which all covered losses during the year are added together and the insurer pays only when the aggregate deductible amount is exceeded.

Question 3

Define “All-risk”/Open Perils/Special Coverage policy

Answer 3

Coverage by an insurance contract that promises to cover all losses except those losses specifically excluded in the policy.

Question 4

Define Calendar-year deductible

Answer 4

Amount payable by the insured during a calendar year before a group or individual health insurance policy begins to pay for medical expenses.

Question 5

Define Coinsurance Clause

Answer 5

Common clause in property insurance contracts that requires the insured to maintain insurance on the property a stated percentage of its actual cash value or its replacement cost. Payment for a loss is determined by multiplying the amount of the loss by the fraction derived from the amount of insurance required. If the coinsurance requirement is not met at the time of loss, the insured will be penalized. In health insurance, coinsurance is a provision that requires the insured to pay a specified percentage of covered medical expenses in excess of the deductible.

Question 6

Define Conditions

Answer 6

Provisions inserted in an insurance contract that qualify or place limitations on the insurer’s promise to perform. If policy conditions are not met, the insurer can refuse to pay the claim.

Question 7

Define Contribution by Equal Shares

Answer 7

Type of other-insurance provision often found in liability contracts that requires each company to share equally in the loss until the share of each insurer equals the lowest limit of liability under any policy or until the full amount of loss is paid.

Question 8

Define Coordination-of-Benefits Provision

Answer 8

Provision in a group medical expense plan that prevents over-insurance and duplication of benefits when one person is covered under more than one group plan. The provision specified the order of payment when more than one group medical expense plan covers the loss.

Question 9

Define Declarations

Answer 9

Statements in an insurance contract that provide information about the property to be insured and used for underwriting and rating purposes and identification of the property to be insured.

Question 10

Define Deductible

Answer 10

A provision by which a specified amount is subtracted from the total loss payment that would have otherwise be paid.

Question 11

Define Elimination (waiting) period

Answer 11

Waiting period in health insurance during which benefits are not paid. Also a period of time that must by met before disability benefits are payable.

Question 12

Define Endorsements and Riders

Answer 12

• In property and liability insurance, an endorsement is a written provision that adds to, deletes from, or modifies the provisions in the original contact
• In life and health insurance, a rider is a provision that amends or changes the original policy.

Question 13

Define Equity in Rating

Answer 13

The fundamental purpose of coninsurance is to achieve equity in rating. It is to be fair to insureds who wish to insure their property to full value and would not get a good rate if everyone insures only for the partial loss (which would result in a higher premium)

Question 14

Define Exclusions

Answer 14

Provisions in an insurance contract that list the perils, losses, and property excluded from coverage.

Question 15

Define First Named Insured

Answer 15

The first name that appears on the declarations page of the policy as an insured who has certain additional rights and responsibilities that do not apply to other named insureds.

Question 16

Define Insuring Agreements

Answer 16

The heart of the insurance contract, it is the part of an insurance contract that states the promises of the insurer.

Question 17

Define Large-Loss Principle

Answer 17

The concept of using insurance premiums to pay for large losses rather than for small losses. The objective is to cover large losses that can financially ruin a person and exclude small losses that can be budgeted out of the person’s income.

Question 18

Define Named Insured

Answer 18

The person or persons named in the declarations section of the policy, as opposed to someone who may have an interest in the policy but is not named as insured.

Question 19

Define Named-Perils Policy

Answer 19

Coverage by an insurance contract that promises to pay only for those losses caused by perils specifically listed in the policy.

Question 20

Define Other-Insurance Provisions

Answer 20

Provisions whose purpose is to prevent profiting from insurance and violation of the principle of indemnity when more than one policy covers a loss.

Question 21

Define Primary and Excess Insurance

Answer 21

Type of other-insurance provision that requires the primary insurer to pay first in the case of a loss; when the policy limits under the primary policy are exhausted, the second insurer pays the excess.

Question 22

Define Pro Rata Liability

Answer 22

A generic term for a provision that applies when two or more policies of the same type cover the same insurable interest in the property. Each insurer pays based on the proportion that its insurance bears to the total amount of insurance on the property.

Question 23

Define Other Insured

Answer 23

Person or parties who are insured under the named insured’s policy even though they are not specially named in the policy.

Question 24

Define Straight Deductible

Answer 24

Deductible in an insurance contract by which the insured must pay a certain number of dollar of loss before the insurer is required to make a payment.

Question 25

What are the common parts of an insurance contact?

Answer 25

• Declarations
• Definitions
• Insuring Agreement
• Exclusions
• Conditions
• Miscellaneous Provisions

Question 26

In property insurance, what information is typically contained on the declarations page? 7

Answer 26

• Identification of the insurer
• Name of the insured
• Location of the property
• Period of Protection
• Amount of Insurance
• Amount of the Premium
• Size of the Deductible (if any)

Question 27

What are the two basic forms on insuring agreements in property insurance?

Answer 27

• Named-Perils Coverage

- Open-Perils Coverage

Question 28

Who holds the burden of proof when deciding whether an incident is covered under property insurance?

Answer 28

• In open-perils coverage, to deny payment, the insurer must prove that the loss is excluded.
• In named-perils coverage, the burden of proof is on the insured to show that the loss was caused by a named peril.

Question 29

What kind of insuring agreement does a life insurance policy have?

Answer 29

Open Perils

Question 30

What are the three major types of exclusions?

Answer 30

• Excluded perils, e.g. flood, intentional act
• Excluded losses, e.g., a professional liability loss is excluded in a homeowners policy
• Excluded property, e.g., pets are not covered as personal property in the homeowners policy.

Question 31

Why are exclusions necessary? 6

Answer 31

• Certain perils are considered uninsurable - losses due to war
• Presence of extraordinary hazards - using car as a taxi
• Coverage provided by other contracts
• Moral hazard problems
• Attitudinal hazard problems
• Coverage not needed by typical insureds

Question 32

What are some common conditions in property insurance? 4

Answer 32

• Notifying the insurer of the loss
• Protecting the property after a loss
• Preparing an inventory of damaged personal property
• Cooperating with the insurer in the event of a liability suit.

Question 33

What are some common provisions in a property insurance contract? 4

Answer 33

• Cancellation
• Subrogation
• Requirements if a loss occurs
• Assignment of the policy

Question 34

What are some common provisions in a life or health insurance contract?

Answer 34

• Grace period
• Reinstatement of a lapsed policy
• Misstatement of age

Question 35

What four categories can an “insured” fall under?

Answer 35

• Named Insured
• First Named Insured
• Other Insureds
• Additional Insureds

Question 36

What additional rights and responsibilities does the first named insure have that do not apply to other named insureds?

Answer 36

• Right to a premium refund
• Right of receipt of a cancellation notice
• Responsibility for paying premiums
• Responsibility for complying with notice-of-loss requirements.

Question 37

In what types of insurance are deductibles typically found? 3

Answer 37

Property
Auto
Health

Question 38

What purposes do deductibles have?

Answer 38

• To eliminate small claims (they are expensive to handle and process)
• To reduce premiums
• To reduce moral and attitudinal hazard

Question 39

What are the common types of deductibles in property insurance?

Answer 39

• Straight Deductible

- Aggregate Deductible

Question 40

What are the common types of deductibles in health insurance?

Answer 40

• Calendar-year
• Corridor
• Elimination (waiting) period

Question 41

Define Corridor Deductible

Answer 41

A deductible that can be used to integrate a basic medical expense plan with a supplemental major medical expense plan.

Question 42

What is the coinsurance formula?

Answer 42

Amount of insurance carried/amount of insurance required x Loss - deductible = Amount of recovery.

Question 43

What points should be kept in mind when applying the coinsurance formula?

Answer 43

• The amount paid 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 amount of the insurance.

Question 44

What happens if a coinsurance is met? Not met?

Answer 44

• If the coinsurance requirement is met, the insured receives a rate discount
• A policyholder who is under insured is penalized through application of the coinsurance formula.

Question 45

What does a coinsurance clause in a health insurance policy require?

Answer 45

The insured to pay a specified % of covered medical expenses in excess of the deductible.

Question 46

What is the purpose of coinsurance in health insurance?

Answer 46

Reduce premiums

Prevent overutilization of policy benefits.

Question 47

What is the purpose of other-insurance provisions?

Answer 47

To prevent profiting from insurance and violation of the principle of indemnity.

Question 48

What are important other-insurance provisions in property and liability insurance?

Answer 48

• The Pro rata liability insurance
• Contribution by equal shares
• Primary and excess insurance
• Coordination of benefits provision

Question 49

What is the coordination of benefits provision?

Answer 49

In group health insurance it is designed to prevent overinsurance and duplication of benefits if one person is covered under more than one group heath insurance plan.