Declarations

Definitions

Insuring Agreement

Exclusions

Conditions

Miscellaneous

1. Named Perils: any peril listed or named is covered. Those not listed are excluded.

2. All-Risk: Everything is covered except for the ones that are listed or named. ex: life insurance except suicide within first 2 years of purchase. 

Some perils are considered uninsurable

Some hazards are extraordinary

Coverage provided by other contracts

Moral hazard problems

Coverage not needed by typical insureds

A provision that legally adds to, deletes from, or  modifies the original policy

Property Insurance—endorsement

Replacement cost coverage on contents

Life Insurance—rider

Waiver of premium rider

Accidental death (Double Indemnity)

A specific amount that is subtracted from the  indemnity payment (that would otherwise be total)

**the insured pays part of the loss

Found in property, auto, and health insurance (not in  life or liability)

Raising deductibles (increasing retention amount)  can lower premiums significantly—up to 25% by  going from $250 to $1000

1) to eliminate small claims: because of this, insurer's loss adjustment expenses are reduced. 

2) Are also use to reduce premiums paid by the insured: because deductible eliminate small claims, premiums are reduced. Insurance should not be for small losses that could otherwise be paid for by better budgeting out of personal/business income. 

--insurance should cover catastrophic events. 

-large loss principle

--larger deductibles are PREFERRABLE to smaller ones because premiums are lower each year. 

3) are used by insurers to reduce both moral hazard and attitudinal hazard: bearing a part of the loss helps insureds realize that they cannot profit from a loss. also enables people to be more careful and not so reckless to cause a loss. 

the concept of using insurance premiums to pay for large losses rather than for small losses. 

-objective is to cover large losses that can financially ruin an individual and exclude small losses that can be budgeted out of the persons income. 

Deductibles commonly found in property insurance:

2 types

1) straight deductible: the insured must pay a certain # of dollars of loss before the insurer is required to make a payment. 

--applies only to EACH loss that occurs.

--ex: Ashley has a collision accident and her deductible is $500 on her collision insurance. if she causes $7000 worth of damage, then she would first have to pay $500 and the insurer would pay the rest of $6500.

2) Aggregate Deductible: means that all losses that occur during a specified time such as one year are accumulated to satisfy the deductible amount. 

--once the deductible is satisfied, the insurer pays all future losses in full. 

1) calender year deductible: a type of aggregate deductible that is found in basic medical expense and major medical insurance contracts. Medical expenses are accumulated and once they reach the deductible amount, then the insurer pays the rest of it in full.

**problem is not, that once the aggregate deductible is met, there is little incentive to contain costs (morale hazard problem).

2) Corridor Deductible: a deductible that is used to integrate a basic medical expense plan with a supplemental mahor medical expense plan.

--the corridor deductible applies only to eligible medical expenses that are not covered by the basic medical expense plan.  

ex: you must pay the $300 corridor deductible on the major medical expense plan before you recieve any benefits from it. 

3) elimination (waiting) period: is a stated period of time at the beginning of a loss during which no insurance benefits are paid. 

ex: disability income contracts--must wait 30,60,90 or even longer before you can recieve benefits. 

--appears in property insurance contracts. 

-requires the insured to insure the propert to a stated %tage of its insurable value.

--if not, insured must share in the loss as a coinsurer.

--payment will never exceed the limit of coverage

--payment will never exceed the amount of the loss. 

**creates equity in rating

--most losses are NOT total losses, however if everyone insured only for partial losses, rates would have to be higher. 

--a coinsurance rate of 80% is typically used. However, the premium rate decreases as the coinsurance %tage increases. 

**insurance-to-value requirements lower rates for consumers.

**percentage participation clause: a provision that requires the insured to pay a specified %tage of covered medical expenses in excess of the deductible. 

**use a combination of deductible, coinsurance, and cap that results in "out of pocket" limit. 

**used in conjunction with the word deductible

**80/20% is common.

**purpose is to prevent overuse of benefits and to reduce premiums. 

Other Insurance Provisions

3 types

*typically present in property and causualty insurance and health insurance contracts. 

*these provisions apply when more than one contract covers the same loss. 

--included to prevent double collecting

1. Pro Rata: 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's share of the loss is based on the proportion that its insurance bears to the total amount of insurance on the property. 

2. Equal Shares: often appears in liability insurance contracts. each insurer shares equally in the loss until the share paid by each insurer equals the lowest limit of liability under any policy, or until the full amt of the loss is paid. 

If the loss is more than the limit of one of the insurers. That insurer pays its limit and the others split the rest evenly and so on. 

3. Primary/Excess: the primary insurer pays first, and the excess insurer pays only after the policy limits under the primary policy are exhausted. 

**auto insurance is an excellent example!

ex: if bob borrows jills car and gets into a wreck and causes damages of $75,000. Jills insurance is primary and would cover and costs. her limit is $50,000 and therefore that is how much she would pay. Bobs limit is $100,000 but he only has to pay the remaining of $25,000.