Standard Insurance Policies
Most insurance policies are standardized, based upon the forms created by the ISO or the American Association of Insurance Services, a national insurance advisory organization that develops policy forms, manual rules, and rating information for property and casualty companies throughout the United States.
Policies have to be standardized for a number of reasons. Each state has legal requirements regarding what insurance policies must cover. Also, premium rates are based on actuarial studies of insurable risks, and such studies are only valid for the losses and their associated conditions that were actually studied. Furthermore, policies incorporate previous court rulings regarding various aspects of the basic insurance contract, particularly to prevent any ambiguities, since ambiguities are almost always interpreted to favor the insured over the insurer.
Most policies can be divided into the following sections: declarations, definitions, insuring agreement, exclusions, conditions, endorsements and riders, and other provisions. Some of these sections may be repeated for different parts of the policy.
Declarations are the 1st part of the contract that contain information derived from the insurance application, which provides the information for rating the risk of the applicant. All declarations contain the name of the insured, the insurer, the property or activity to be insured, the period covered, the policy number, and the amount of the premium. Property insurance also lists the location of the property, and the size of deductible. The life insurance declaration has the name and age of the insured and the issue date.
The definitions section lists the key terms and phrases to minimize ambiguity, so that the insurance applicant clearly understands the offer. A general principle in contract law is that ambiguities are generally interpreted against the maker of the contract, so courts always interpret ambiguities to benefit the insured. Clear definitions lower this risk to the insurer and helps the insurance applicant to understand the insurance contract.
One of the primary definitions is the named insured, which includes not only people mentioned in the declarations section, but any others who are included for coverage even if not named specifically. For instance, car insurance covers not only the owner of the car, but also anyone who drives it. A homeowner's policy typically covers the owners, everyone under 21 under the care of the insured, and relatives under 24 who are students, but are otherwise living at the home of the insured.
The insuring agreement states what the insurer promises and under what conditions. This section generally lists such things as the covered perils or exclusions, services provided by the insurer, such as loss prevention, or defending the insured in a liability lawsuit.
Property insurance can be classified as named-perils coverage and all-risks coverage (aka open-perils policy, special coverage policy). Named-perils coverage policy only covers what is specifically stated in the policy. An all-risks coverage policy covers any risk that is not specifically excluded. All-risk coverage is more comprehensive. In the case of a loss, the burden of proof is on the insurer that the loss was excluded. With a named-perils policy, the burden of proof is on the insured that it was included.
Most policies today do not use the terms all risk, since it might mislead the insurance applicant who doesn't read the policy to believe that the policy covers every possible risk. For instance, the ISO, which provides many of the standardized forms used by insurance companies, is using the phrase risk of direct loss to property. In commercial insurance, the ISO is using the phrase special causes of loss for the all-risk policy, but still includes everything not excluded.
Life insurance is an all-risk insurance policy that covers most causes of death except suicide in the 1st 2 years of the policy, aviation hazards, such as dust cropping and stunt flying, and sometimes, war.
Exclusions are the perils, losses, and property not covered.
To be profitable, insurance companies must exclude many things. The exclusions listed are exclusions that are relevant to the policy as a whole. Uninsurable risks are excluded, such as wear and tear or inherent vice. Extraordinary hazards are excluded because such hazards have greater average losses. Such hazards are covered by an endorsement that commands a higher premium. Moral hazards are excluded because they can create the temptation to cause losses to collect the insurance money. A common exclusion in a homeowner's policy is any amount of cash over a certain limit, such as $200. In cases of fire, for instance, there usually is no way to verify the amount of cash that was destroyed. If insurance companies paid the amount claimed by the insured, the insured might claim much more than was actually lost, and, thus, cause the loss to make money.
The other reason for exclusions is to keep the premium affordable by not covering what is already covered by other insurance, and not covering what most insureds have no need to cover. For instance, a typical homeowner's policy does not include coverage for expensive jewelry, because most people don't have expensive jewelry. For those that do, they can purchase an endorsement specifically to cover the jewelry. To include jewelry in a standard contract would raise premiums for everyone, including those without any jewelry—thus, they would be subsidizing the insurance premiums of those with expensive jewelry.
Excluded perils in a homeowner's policy include those perils that could cause extensive damage in a given area: flood, earth movement, and nuclear radiation or contamination. Car insurance doesn't cover collisions when the car is used as a taxicab, for instance, and property and liability insurance typically excludes war.
Excluded losses are losses that should be covered by another policy, or because the insured failed to do something to minimize the amount of the loss. For instance, if the homeowner fails to protect property after a loss, then the insurer will not have to pay.
Excluded property for a homeowner's policy usually includes planes, autos, and animals, and also property owned by others, but kept by the insured.
Conditions are the required actions by the insured after a loss, such as notifying the insurer, preventing further losses, providing an inventory of damaged property within a certain time after the loss, and cooperation in a liability lawsuit.
Endorsements and Riders
Endorsements and riders are defined similarly and used interchangeably, and are additions, deletions, or other modifications to the original contract. The term endorsements is more prevalent in property and liability insurance, and riders is more prevalent in life and health insurance contracts. Because endorsements and riders are added for specific insureds, they generally have greater weight than other terms of the contract when there is a conflict between them, unless they violate laws as to what is required in insurance contracts.
This section covers anything not included in the other sections. For property and liability insurance, for instance, it may explain the procedure to cancel the insurance, or how to assign the policy. This section in a life or health insurance policy may include the grace period, how to reinstate a lapsed policy, or the consequences of misstating the age of the insured.