Basic Parts of an Insurance Contract

Despite their complexities, insurance contracts generally can be divided into the following parts;

  • Declarations.
  • Definitions.
  • Insuring agreement.
  • Exclusions.
  • Conditions.
  • Miscellaneous provisions.

Although all insurance contracts do not necessarily contain all six parts in the order given here, such a classification provides a simple and convenient framework for analyzing most insurance contracts.

Declarations; The declarations section is the first part of an insurance contract. Declarations are statements that provide information about the particular property or activity to be insured. Information contained in the declarations section is used for underwriting and rating purposes and for identification of the property or activity that is insured. The declarations section usually can be found on the first page of the policy or on a policy insert.

In property insurance, the declarations page typically contains information concerning the 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 and other relevant information. In life insurance, although the first page of the policy technically is not called a declarations page, it contains the insured’s name age, premium amount, issue date, and policy number.

Definitions; Insurance contracts typically contain a page or section of definitions. Key words or phrases have quotation marks around them. The name insured is referred to as you and your. The purpose of the various definitions is to define clearly the meaning of key words on phrases so that coverage under the policy can be determined more easily.

Insuring Agreement; The insuring agreement is the heart of an insurance contract, The insuring agreement summarizes the major promises of the insurer. The insurer agrees to do certain things, such as paying losses from covered perils, providing certain services or agreeing to defend the insured in a liability lawsuit. There are two basic forms of an insuring agreement in property insurance;1/ Named-Perils coverage and 2/ Open perils coverage. Under a named perils policy, only those perils specifically named in the policy are covered. If the peril is not named, it is not covered. For example, in a homeowners policy, personal property is covered for fire, lightning, wind-storm, and certain other named perils. Only losses caused by these perils are covered. Flood damage is not covered. Flood damage is not covered because flood is not a listed peril.

Under an open-perils, all losses are covered except those losses specifically excluded. An open-perils policy is also called a special coverage policy. If the loss is not excluded, then it is covered. For example, the physical damage section of the personal auto policy covers losses to a covered auto. Thus, if a smoker burns a hole in the upholstery, or a bear in a national park damages the vinyl top of a covered auto, the losses would be covered because they are not excluded.

An open perils policy generally is preferable to named perils coverage, because the protection is broader with fewer gaps in coverage. If the loss is not excluded, then it is not covered. In addition a greater burden of proof is on the inured to show that the loss was caused by a named peril. Because the meaning of risk is ambiguous rating organizations generally have deleted the words ‘risk of and all risk’ in their policy forms. In the latest edition of the homeowners forms. In the latest edition of the homeowner’s forms the Insurance Services Office has deleted the words risk of which appeared in the earlier editions. The deletion of any reference to risk of all risk is intended to avoid creating unreasonable expectations among policy holders that the policy covers all losses, even those losses that are specially excluded.

Life Insurance is another example of an open-perils policy. Most life insurance contracts over all causes of death by accident or by diseases except for certain exclusions. The major exclusions are suicide during the first two years of contract; certain hazard exclusions, such as military flying crop dusting or sports piloting and in some contracts death caused by war.

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