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UNIT TWO EXAM OUTLINE CHAPTER 7 Analysis of Insurance Contracts 1 Basic Parts of an Insurance Contract activity to be insured a Declarations statements that provide information about the particular property or i Can usually be found on the first page of the policy ii In property insurance it contains name of the insured location of property period of protection amount of insurance premium and deductible information b Definitions i Insurance contracts typically contain a page or section of definitions 1 Defines the key words or phrases so that coverage under the policy can be determined more easily 2 For example the insured is referred to as you c Insuring agreement summarizes the major promises of the insurer i The two basic forms of an insuring agreement in property insurance are 1 Named perils coverage policy only those perils specifically named in the policy are covered a Example in the homeowner s policy personal property is covered for fire lightning windstorm and certain other named perils Only losses caused by these perils are covered Flood damage is not covered because flood is not a listed peril 2 All risk policy open perils policy or special coverage all losses are covered except those losses specifically excluded a 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 b All risks is preferred to named perils coverage because the protection is broader with fewer gaps in coverage c Example life insurance d Exclusions provisions in insurance contract that list the perils losses and property excluded from coverage i Three major types of exclusions 1 Excluded perils a Homeowners insurance flood earth movement nuclear radiation radioactive contamination b Physical damage of personal auto is excluded if the car is used as a public taxi i e Uber Intentional act c a Professional liability loss is excluded in the homeowner s 2 Excluded losses policy 3 Excluded property a Pets are not covered as personal property in the homeowner s policy ii Reasons for exclusions 1 Some perils are not commercially insurable a E g catastrophic losses due to war 2 Extraordinary hazards are present a E g using the automobile for a taxi 3 Coverage is provided by other contracts a E g use of auto excluded on homeowners policy a E g coverage of money limited to 200 in homeowner s 4 Moral hazards problems policy 5 Attitudinal hazard problems a E g individuals are forced to bear losses that result from their own carelessness 6 Coverage not needed by typical insureds a E g homeowners policy doesn t cover aircraft 7 Inherent vice the destruction or damage of property without any tangible external force such as the tendency of fruit to rot and the tendency of diamonds to crack 8 May be duplicated in the contract already e Conditions provisions in the policy that qualify or place limitations on the insurer s promise to perform i If policy conditions are not met the insurer can refuse to pay the claim ii Conditions impose certain duties on the insured if he or she wishes to collect for a loss f Miscellaneous provisions i Insurance policies contain a variety of miscellaneous provisions 1 E g cancellation subrogation grace period misstatement of age 2 Definition of Insured a An insurance contract must identify the persons or parties who are insured under the policy i Categories of Insured 1 Named insured the person or party named on the declarations page of the policy 2 First named insured the first name that appears on the declarations page of the policy as an insured 3 Other insureds persons or parties who are insured under the named insured s policy even though they are not specifically named in the policy 4 Additional insured a person or party who is added to the named insured s policy by an endorsement a Children can be additionally insured b Not just the named insured also family members etc 3 Endorsements and Riders a 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 i E g an earthquake endorsement to a homeowners policy b In life and health insurance a rider is a provision that amends or changes the original policy i E g a waiver of premium rider on a life insurance policy c A rider is similar to an endorsement but you can add something or take d The reason for endorsements and riders is so an individual can customize their something away policy to fit their needs 4 Deductible a provision by which a specified amount is subtracted from the total loss payment that otherwise would be payable a The purpose of a deductible is to i Eliminate small claims that are expensive to handle and process 1 For example an insurer can easily incur expenses of 500 or more in processing a 100 claim Because a deductible eliminates small claims the insurer s loss adjustment expenses are reduced ii Reduce premiums paid by the insured iii Reduce moral hazard and attitudinal morale hazard iv Large loss principle concept of using insurance premiums to pay for large losses rather than for small losses v Deductibles in Property Insurance 1 Straight deductible the insured must pay a certain number of dollars of loss before the insurer is required to make a payment a Example Ashley has collision insurance on her new Toyota with a 500 deductible If a collision loss is 7000 she would receive only 6500 and would have to pay the remaining 500 herself vi Deductibles in Health Insurance 2 Aggregate deductible all losses that occur during a specified time period usually a year are accumulated to satisfy the deductible amount a Example Assume that the policy contains an aggregate deductible of 10 000 Also assume that losses of 1000 and 2000 occur respectively during the policy year The insurer pays nothing because the deductible is not met If a third loss of 8000 occurs during the same time period the insurer would pay 1000 Any other losses occurring during the policy year would be paid in full by the insurer 1 Calendar year deductible type of aggregate deductible that is found in basic medical expense and major medical insurance contracts 2 Corridor deductible deductible that can be used to integrate a basic medical expense plan with a supplemental major medical expense plan a Applies only to


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FSU RMI 3011 - CHAPTER 7 Analysis of Insurance Contracts

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Test 2

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Test 1

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TEST 2

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Chapter 1

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Notes

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