Topic 3 Chapter 10 Analysis of Insurance Contracts
Topic 3 Chapter 10 Analysis of Insurance Contracts
Topic 3 Chapter 10 Analysis of Insurance Contracts
CONTRACTS
Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved 7-1
Agenda
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Basic Parts of an Insurance
Contract
• Declarations are statements that provide
information about the particular property or activity
to be insured
– Usually the first page of the policy
– In property insurance, it contains name of the insured,
location of property, period of protection, amount of
insurance, premium and deductible information
• Insurance contracts typically contain a page or
section of definitions
– For example, the insured is referred to as “you”
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auto insurance declaration page
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Basic Parts of an Insurance
Contract
• The insuring agreement summarizes the major
promises of the insurer
– The two basic forms of an insuring agreement in
property insurance are:
• Named perils policy, where only those perils specifically named
in the policy are covered
• “All-risks” policy, where all losses are covered except those
losses specifically excluded
– May also be called an open-perils policy or special coverage policy
– Insurers have generally deleted the word “all” from policies
• “All-risks” coverage has fewer gaps, and the burden of proof is
placed on the insurer to deny a claim
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Basic Parts of an Insurance
Contract
• Insurance contracts contain three major
types of exclusions
– Excluded perils, e.g., flood, intentional act
– Excluded losses, e.g., a professional liability
loss is excluded in the homeowners policy
– Excluded property, e.g., pets are not covered as
personal property in the homeowners policy
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Basic Parts of an Insurance
Contract
• Exclusions are necessary because:
– Some perils are not commercially insurable
• e.g., catastrophic losses due to war
– Extraordinary hazards are present
• e.g., using the automobile for a taxi
– Coverage is provided by other contracts
• e.g., use of auto excluded on homeowners policy
– Moral hazard is present or it would be difficult to measure the
amount of loss
• e.g., coverage of money limited to $200 in homeowners policy
– Coverage not needed by typical insureds
• e.g., homeowners policy does not cover aircraft
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Basic Parts of an Insurance
Contract
• Conditions are provisions in the policy that qualify
or place limitations on the insurer’s promise to
perform
– If policy conditions are not met, insurer can refuse to
pay the claim
• Insurance policies contain a variety of
miscellaneous provisions
– e.g., cancellation, subrogation, grace period,
misstatement of age
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Definition of the “Insured”
• An insurance contract must identify the persons or
parties who are insured under the policy
– The named insured is the person or persons named in
the declarations section of the policy
– The first named insured has certain additional rights
and responsibilities that do not apply to other named
insureds
– A policy may cover other parties even though they are
not specifically named
– Additional insureds may be added using an endorsement
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Endorsements and Riders
• In property and liability insurance, an endorsement
is a written provision that adds to, deletes from, or
modifies the provisions in the original contract
– e.g., an earthquake endorsement to a homeowners
policy
• In life and health insurance, a rider is a provision
that amends or changes the original policy
– e.g., a waiver-of-premium rider on a life insurance 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 be payable
• The purpose of a deductible is to:
– Eliminate small claims that are expensive to handle and
process
– Reduce premiums paid by the insured
• Under the large loss principle, insurance should pay for high
severity losses; small losses can be budgeted out of the person’s
income
– Reduce moral and morale hazard
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Deductibles
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Deductibles in Health Insurance
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Coinsurance
• A coinsurance clause in a property insurance contract
encourages the insured to insure the property to a stated
percentage of its insurable value
– If the coinsurance requirement is not met at the time of the loss, the
insured must share in the loss as a coinsurer
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Coinsurance
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Exhibit 10.1 Insurance to
Full Value
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Exhibit 10.2 Insurance to Half
Value
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Coinsurance in Health Insurance
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Other-insurance Provisions
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Exhibit 10.3 Pro Rata Liability
Example
Client is Insured for 500,000; Amount of
loss =100,00; Pro rate sharing: A :60%,
B:20%, C:20%
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Exhibit 10.4 Contribution
by Equal Shares (Example 1)
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Exhibit 10.5 Contribution
by Equal Shares (Example 2)
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Other-insurance Provisions
– Under a primary and excess insurance
provision, the primary insurer pays first, and the
excess insurer pays only after the policy limits
under the primary policy are exhausted
– The coordination of benefits provision in group
health insurance is designed to prevent
overinsurance and the duplication of benefits if
one person is covered under more than one
group health insurance plan
• e.g., two employed spouses are insured as
dependents under each other’s group health
insurance plan
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Example
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Example
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Case Application
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Case Application
a) If a court awards a liability judgment of $100,000
against Donna, how much, if any, will each insurer pay?
b) If the liability judgment is $300,000, how much, if any,
will each insurer pay?
c) Assume that Mike cannot afford to pay the premium
and lets his auto insurance policy lapse. At the time of
the accident, he is uninsured. If the liability judgment
against Donna is $100,000, how much, if any, will
Donna's insurer pay?
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