A contract (policy) in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients’ risks to make payments more affordable for the insured. The insurance contract or agreement is a contract whereby the insurer will pay the insured (the person whom benefits would be paid to, or on behalf of), if certain defined events occur. Subject to the “fortuity principle”, the event must be uncertain.
The uncertainty can be either as to when the event will happen (e. g.in a life insurance policy, the time of the insured’s death is uncertain) or as to if it will happen at all (e. g. in a fire insurance policy, whether or not a fire will occur at all). ?Insurance contracts are generally considered contracts of adhesion because the insurer draws up the contract and the insured has little or no ability to make material changes to it. This is interpreted to mean that the insurer bears the burden if there is any ambiguity in any terms of the contract. Insurance policies are sold without the policyholder even seeing a copy of the contract.
In 1970 Robert Keeton suggested that many courts were actually applying ‘reasonable expectations’ rather than interpreting ambiguities, which he called the ‘reasonable expectations doctrine’. This doctrine has been controversial, with some courts adopting it and others explicitly rejecting it. In several jurisdictions, including California, Wyoming, and Pennsylvania, the insured is bound by clear and conspicuous terms in the contract even if the evidence suggests that the insured did not read or understand them. ?
Insurance contracts are aleatory in that the amounts exchanged by the insured and insurer are unequal and depend upon uncertain future events. In contrast, ordinary non-insurance contracts are commutative in that the amounts (or values) exchanged are usually intended by the parties to be roughly equal. This distinction is particularly important in the context of exotic products like finite risk insurance which contain “commutation” provisions. ?Insurance contracts are unilateral, meaning that only the insurer makes legally enforceable promises in the contract. The insured is not required to pay the premiums, but the insurer is required to pay the benefits under the contract if the insured has paid the premiums and met certain other basic provisions. ?
Insurance contracts are governed by the principle of utmost good faith (uberrima fides) which requires both parties of the insurance contact to deal in good faith and in particular it imparts on the insured a duty to disclose all material facts which relate to the risk to be covered. This contrasts with the legal doctrine that covers most other types of contracts, caveat emptor (let the buyer beware). In the United States, the insured can sue an insurer in tort for acting in bad faith. History The first examples of insurance related to marine activities.
In many ancient societies, merchants and t raders pledged their ships or cargo assecurity for loans. In Babylon creditors charged higher interest r ates to merchants and traders in exchange for a promise to forgive the loan ifthe ship was robbed by p irates or was captured and held for ransom. In postmedieval England, local groups of working people banded together to create “friendly societies, ” forerunners of the modern insurancecompanies. Members of the friendly societies made regular cont ributions to a common fund, which was used to pay for losses suffered bymembers.
The contributions were determined without reference to a member’s age, and without precise identification of what claim s would becovered. Without a system to anticipate risks and potential liability, many of the first friendly societies were unable to pay claims, and manyeventually disbanded. Insurance gradually came to be seen as a matter best handled by a company in the business of providing insurance. Insurance companies began to operate for profit in England during the seventeenth century. They devi sed tables to mathematically predictlosses based on various data, including the characteristics of the i nsured and the probability of loss related to particular risks.
Thesecalculations made it possible for ins urance companies to anticipate the likelihood of claims, and this made the business of insurance relia bleand profitable. Regulation and Control Until the middle of the twentieth century, insurance companies in the United States were relatively free from federal regulation. According tothe U. S. Supreme Court in Paul v. Virginia, 75 U. S. (8 Wall. ) 168, 19 L. Ed. 357 (1868), the issuing of an insurance policy did not constitute acommercial transaction. Thi s meant that states had the power to regulate the business of insurance.
In 1944 the high court held in UnitedStates v. South-Eastern Underwriters Ass’n, 322 U. S. 533, 64 S. Ct. 1162, 88 L. Ed. 1440, that i nsurance did, in some cases, constitute acommercial transaction. This meant that Congress had the p ower to regulate it. The South-Eastern holding made the business of insurancesubject to federal laws on rate fixing and monopolies. Insurance is now governed by a blend of statutes, administrative agency regulations, and court decisio ns. State statutes often controlpremium rates, prevent unfair practices by insurers, and guard against t he financial insolvency of insurers to protect insureds.
At the federallevel, the MCCARRAN-FERGUSON AC T (Pub. L. No. 79-15, 59 Stat. 33 [1945] [codified at 15 U. S. C. A. §§ 1011–1015 (1988)]) permits states to retainregulatory control over insurance, as long as their laws and regulations do not conflict with fed eral ANTITRUST LAWS on rate fixing, ratediscrimination, and monopolies. In most states, an administrative agency created by the state legislature devises rules to cover proced ural details that are missing from thestatutory framework. To do business in a state, an insurer must ob tain a license through a registration process.
This process is usuallymanaged by the state administrati ve agency. The same state agency may also be charged with the enforcement of insurance regulation s andstatutes. Administrative agency regulations are many and varied. Insurance companies must submit to the gove rning agency yearly financial reportsregarding their economic stability. This requirement allows the age ncy to anticipate potential insolvency and to protect the interests ofinsureds. Agency regulations may s pecify the types of insurance policies that are acceptable in the state, although many states make thes edeclarations in statutes.
The administrative agency is also responsible for reviewing the competence and ethics of insurance companyemployees. The judicial branches of governments also shape insurance law. Courts are often asked to resolve dis putes between the parties to aninsurance contract, and disputes with third parties. Court decisions inte rpret the statutes and regulations based on the facts of the case,creating many rules that must be follo wed by insurers and insureds. Insurance companies may be penalized for violating statutes or regulations.
Penalties for misconduct i nclude fines and the loss or suspensionof the company’s business license. In some states, if a court fi nds that an insurer’s denial of coverage or refusal to defend an insured in alawsuit was unreasonable, the insurance company may be required to pay court costs, attorneys’ fees, and a percentage beyond the insured’srecovery. Types of Insurance Insurance companies create insurance policies by grouping risks according to their focus. This provide s a measure of uniformity in the risksthat are covered by a type of policy, which in turn allows insurers to anticipate their potential losses and to set premiums accordingly.
Themost common forms of insura nce policies include life, health, automobile, homeowners’ and renters’, Personal Property, fire and casualty,marine, and inland marine policies. Life insurance provides financial benefits to a designated person upon the death of the insured. Many different forms of life insurance areissued. Some provide for payment only upon the death of the insur ed; others allow an insured to collect proceeds before death. A person may purchase life insurance on his or her own life for the benefit of a third person or persons.
Individuals may even purchase lifeinsurance on the life of another person. For example, a wife may p urchase life insurance that will provide benefits to her upon the death of herhusband. This kind of polic y is commonly obtained by spouses and by parents insuring themselves against the death of a child. H owever,individuals may only purchase life insurance on the life of another person and name themselve s beneficiary when there are reasonablegrounds to believe that they can expect some benefit from the continued life of the insured.
This means that some familial or financialrelationship must unite the bene ficiary and the insured. For example, a person may not purchase life insurance on the life of a stranger in thehope that the stranger will suffer a fatal accident. Health insurance policies cover only specified ri sks. Generally, they pay for the expensesincurred from bodily injury, disability, sickness, and accidenta l death. Health insurance may be purchased for one’s self and for others. All automobile insurance policies contain liability insurance, which is insurance against injury to anothe r person or against damage to anotherperson’s vehicle caused by the insured’s vehicle.
Auto insuranc e may also pay for the loss of, or damage to, the insured’s motor vehicle. Most states require that all dri vers carry, at a minimum, liability insurance under a no-fault scheme. In states that recognize no- faultinsurance, damages resulting from an accident are paid for by the insurers, and the drivers do not have to go to court to settle the issue ofdamages. Drivers in these states may bring suit over an accide nt only in cases of egregious conduct, or where medical or repair costs exceedan amount defined by s tatute.
Homeowners’ insurance protects homeowners from losses relating to their dwelling, including damage to the dwelling; personal liability forinjury to visitors; and loss of, or damage to, property in and around the dwelling. Renters’ insurance covers many of the same risks forpersons who live in rented dwelling s. As its name would suggest, personal property insurance protects against the loss of, or damage to, ce rtain items of personal property. It isuseful when the liability limit on a homeowner’s policy does not co ver the value of a particular item or items. For example, the owner of anoriginal painting by Pablo Pica sso might wish to obtain, in addition to a homeowner’s policy, a separate personal property policy to in sureagainst loss of, or damage to, the painting.
Businesses can insure against damage and liability to others with fire and casualty insurance policies. Fire insurance policies cover damagecaused by fire, explosions, earthquakes, lightning, water, wind, r ain, collisions, and riots. Casualty insurance protects the insured against avariety of losses, including t hose related to legal liability, Burglary and theft, accidents, property damage, injury to workers, and ins urance oncredit extended to others. Fidelity and surety bonds are temporary, specialized forms of cas ualty insurance.
A fidelity bond insures againstlosses relating to the dishonesty of employees, and a s urety bond provides protection to a business if it fails to fulfill its contractualobligations. Marine insurance policies insure transporters and owners of cargo shipped on an ocean, a sea, or a n avigable waterway. Marine risks includedamage to cargo, damage to the vessel, and injuries to passe ngers. Inland marine insurance is used for the transportation of goods on land and on land-locked lakes. Many other types of insurance are also issued. Group health insurance plans are usually offered by e mployers to their employees.
A personmay purchase additional insurance to cover losses in excess of a stated amount or in excess of coverage provided by a particular insurancepolicy. Air-travel insurance provides life insurance benefits to a named beneficiary if the insured dies as a result of the specified ai rplane flight. Flood insurance is not included in most homeowners’ policies, but it can be purchased se parately. Mortgage insurance requires the insurer tomake mortgage payments when the insured is una ble to do so because of death or disability. Contract and Policy An insurance contract cannot cover all conceivable risks.
An insurance contract that violates a statute, is contrary to public policy, or plays apart in some prohibited activity will be held unenforceable in court . A contract that protects against the loss of burglary tools, for example, iscontrary to public policy and thus unenforceable. Insurable Interest To qualify for an insurance policy, the insured must have an insurable interest, meaning that the insure d must derive some benefit from thecontinued preservation of the article insured, or stand to suffer so me loss as a result of that article’s loss or destruction. Life insurancerequires some familial and pecuni ary relationship between the insured and the beneficiary.
Property insurance requires that the insured mustsimply have a lawful interest in the safety or preservation of the property. Premiums Different types of policies require different premiums based on the degree of risk that the situation pres ents. For example, a policy insuring ahomeowner for all risks associated with a home valued at $200,0 00 requires a higher premium than one insuring a boat valued at $20,000. Although liability for injuries t o others might be similar under both policies, the cost of replacing or repairing the boat would be less t han thecost of repairing or replacing the home, and this difference is reflected in the premium paid by t he insured.
Premium rates also depend on characteristics of the insured. For example, a person with a poor drivin g record generally has to pay more forauto insurance than does a person with a good driving record. F urthermore, insurers are free to deny policies to persons who present anunacceptable risk. For exampl e, most insurance companies do not offer life or health insurance to persons who have been diagnose d with aterminal illness.
Claims The most common issue in insurance disputes is whether the insurer is obligated to pay a claim. The d etermination of the insurer’s obligationdepends on many factors, such as the circumstances surroundi ng the loss and the precise coverage of the insurance policy. If a disputearises over the language of th e policy, the general rule is that a court should choose the interpretation that is most favorable to the in sured. Many insurance contracts contain an Incontestability Clause to protect the insured. This clause provides that the insurer loses the right tocontest the validity of the contract after a specified period of time.
An insurance company may deny or cancel coverage if the insured party concealed or misrepresented a material fact in the policy application. If an applicant presents an unacceptably high risk of loss for an insurance company, the company may deny the application or chargeprohibitively high premiums. A c ompany may cancel a policy if the insured fails to make payments. It also may refuse to pay a claim if t heinsured intentionally caused the loss or damage. However, if the insurer knows that it has the right t o rescind a policy or to deny a claim, butconveys to the insured that it has voluntarily surrendered such right, the insured may claim that the insurer waived its right to contest a claim.
An insurer may have a duty to defend an insured in a lawsuit filed against the insured by a third party. This duty usually arises if the claims inthe suit against the insured fall within the coverage of a liability policy. If a third party caused a loss covered by a policy, the insurance company may have the right to sue th e third party in place of the insured. This right is called Subrogation, and it is designed to make the part y that is responsible for a loss bear the burden of the loss.
It also preventsan insured from recovering t wice: once from the insurance company, and once from the responsible party. An insurance company can subrogate claims only on certain types of policies. Property and liability ins urance policies allow subrogationbecause the basis for the payment of claims is indemnification, or rei mbursement, of the insured for losses. Conversely, life insurancepolicies do not allow subrogation. Life insurance does not indemnify an insured for a loss that can be measured in dollars. Rather, it is a form of investment for the insured and the insured’s beneficiaries.
A life insurance policy pays only a fixed s um of money to the beneficiary anddoes not cover any liability to a third party. Under such a policy, the insured stands no chance of double recovery, and the insurance companyhas no need to sue a third p arty if it must pay a claim. In a property and casualty contract, the objective is to restore an insured to the same financial position after the loss that he or she was in prior to the loss. But the insured should not be able to profit by damage or destruction of property, nor should the insured be in a worse financial position after a loss. In life insurance the situation is totally different.
By the payment of a single premium, the beneficiary of an insured can be placed in a much better financial position at the death of an insured than he or she was in prior to the death. However, the payment of a predetermined amount upon the insured’s death does not make a life insurance policy a contract of indemnity. In hospital indemnity and other health insurance plans, coordination of benefits is designed so that the insured cannot profit from an illness. STRUCTURE Early insurance contracts tended to be written on the basis of every single type of risk (where risks were defined extremely narrowly), and a separate premium was calculated and charged for each.
This structure proved unsustainable in the context of the Second Industrial Revolution, in that a typical large conglomerate might have dozens of types of risks to insure against. In the 1940s, the insurance industry shifted to the current system where covered risks are initially defined broadly in an insuring agreement on a general policy form (e. g. , “We will pay all sums that the insured becomes legally obligated to pay as damages… “), then narrowed down by subsequent exclusion clauses (e.g. , “This insurance does not apply to… “).
If the insured desires coverage for a risk taken out by an exclusion on the standard form, the insured can sometimes pay an additional premium for an endorsement to the policy that overrides the exclusion. Insurers have been criticized in some quarters for the development of complex policies with layers of interactions between coverage clauses, conditions, exclusions, and exceptions to exclusions. In a case interpreting one ancestor of the modern “products-completed operations hazard” clause, the Supreme Court of California complained:
The instant case presents yet another illustration of the dangers of the present complex structuring of insurance policies. Unfortunately the insurance industry has become addicted to the practice of building into policies one condition or exception upon another in the shape of a linguistic Tower of Babel. We join other courts in decrying a trend which both plunges the insured into a state of uncertainty and burdens the judiciary with the task of resolving it. We reiterate our plea for clarity and simplicity in policies that fulfill so important a public service. Parts of an insurance contract ?
Declarations – identifies who is an insured, the insured’s address, the insuring company, what risks or property are covered, the policy limits (amount of insurance), any applicable deductibles, the policy period and premium amount. These are usually provided on a form that is filled out by the insurer based on the insured’s application and attached on top of or inserted within the first few pages of the standard policy form. ?Definitions – define important terms used in the policy language. ?
Insuring agreement – describes the covered perils, or risks assumed, or nature of coverage, or makes some reference to the contractual agreement between insurer and insured. It summarizes the major promises of the insurance company, as well as stating what is covered. ?Exclusions – take coverage away from the Insuring Agreement by describing property, perils, hazards or losses arising from specific causes which are not covered by the policy. ?Conditions – provisions, rules of conduct, duties and obligations required for coverage. If policy conditions are not met, the insurer can deny the claim. ?Endorsements – additional forms attached to the policy form that modify it in some way, eitherunconditionally or upon the existence of some condition.
Endorsements can make policies difficult to read for nonlawyers; they may modify or delete clauses located several pages earlier in the standard insuring agreement, or even modify each other. Because it is very risky to allow nonlawyer underwriters to directly rewrite core policy language with word processors, insurers usually direct underwriters to modify standard forms by attaching endorsements preapproved by counsel for various common modifications. ?
Policy riders – A policy rider is used to convey the terms of a policy amendment and the amendment thereby becomes part of the policy. Riders are dated and numbered so that both insurer and policyholder can determine provisions and the benefit level.
Common riders to group medical plans involve name changes, change to eligible classes of employees, change in level of benefits, or the addition of a managed care arrangement such as an Health Maintenance Organization or Preferred Provider Organization(PPO). ?Policy jackets – A policy jacket is a cover, binder, envelope, or presentation folder with pockets in which the policy may be delivered. Historically, standard boilerplate provisions common to an entire family of policies were often printed on the jacket itself; then the underwriter would type up the declarations form and insert that form along with insuring agreement and endorsement forms into the jacket to assemble a complete policy.
They are increasingly rare because jackets do not feed through automatic document feeders and must be manually copied or scanned in order to produce a complete image of the entire policy text. Some insurers now use the term “jacket” for a set of papers appended to all policies which serve the same purpose as a traditional policy jacket. Insurance contract e. g.