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RMI3011 Chapter 7 Notes Basic Parts of an Insurance Contract Declarations statements that provide info about the particular property or activity to be insured o Can usually be found on the first page of the policy o In property insurance it contains name of the insured location of property period of protection amount of insurance premium and deductible info o Insurance contracts typically contain a page or section of definitions For example the insured is referred to as you Basic Parts of an Insurance Contract o The insuring agreement summarizes the major promises of the insurer Two basic forms of an insuring agreement in property insurance are Named perils coverage where only those perils specifically named in the policy are covered Open perils or special coverage where all losses are covered except o Insurance contracts contain 3 major types of exclusions those losses specifically excluded Excluded perils flood intentional act etc Excluded losses a professional liability loss is excluded in the homeowners policy Excluded property pets are NOT covered as personal property in the homeowners policy o Why are exclusions necessary Come perils are NOT commercially insurable Catastrophic losses due to war Extraordinary hazards are present Using the automobile for a taxi Coverage is provided by other contracts Use of auto excluded on homeowners policy Moral Hazard problems Coverage of money limited to 200 in homeowners policy Attitudinal Hazard problems Individuals are forced to bear losses that result from their own carelessness Coverage not needed by typical insureds Homeowners policy does not cover aircraft o Conditions are provisions in the policy that qualify or place limitations on the insurer s promise to perform If policy conditions are not met the insurer can refuse to pay the claim Insurance policies contain a variety of misc provisions Cancellation subrogation grace period misstatement of age o Definition of 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 o 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 An earthquake endorsement to a homeowners policy In life and health insurance a rider is a provision that amends or changes the original policy A waiver of premium rider on a life insurance policy o 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 Reduce moral hazard and attitudinal morale hazard With a straight deductible the insured must pay a certain number of dollars of loss before the insurer is required to make a payment Auto insurance deductible An aggregate deductible means that all losses that occur during a specified time period usually a year are accumulated to satisfy the deductible amount A calendar year deductible is a type of aggregate deductible that is found in basic medical expense and major medical insurance contracts An Elimination waiting period is a stated period of time at the beginning of a loss during which no insurance benefits are paid Disability income contracts that replace part of a disabled worker s earnings typically have elimination periods of 30 60 or 90 days or longer periods o 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 Amount of insurance paid amount of insurance required X Loss amount of recovery OR Did should X loss claims payout o The fundamental purpose of coinsurance is to achieve equity in rating Coninsurance A property owner wishing to insure for a total loss would pay an inequitable premium if other property owners only insure for partial losses If the coinsurance requirement is met the insured receives a rate discount and the policy owner who is underinsured is penalized through application of the coinsurance formula o Coinsurance in Health Insurance Health insurance policies frequently contain a coinsurance clause The clause requires the insured to pay a specified percentage of covered medical expenses in excess of the deductible The purposes of coinsurance in health insurance are to reduce premiums and prevent overutilization of policy benefits o Other insurance Provisions The purpose of other insurance provisions is to prevent profiting from insurance and violation of the principle of indemnity Under a pro rata liability provision each insurer s share of the loss is based on the proportion that its insurance bears to the total amount of insurance on the property Under contribution by equal shares each insurer shares equally in the loss until the share paid by each insurer equals the lowest limit of liability under any policy or until the full amount of the loss is paid 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


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FSU RMI 3011 - Basic Parts of an Insurance Contract

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Risk

Risk

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Exam #2

Exam #2

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Exam #2

Exam #2

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Exam #3

Exam #3

9 pages

Exam #3

Exam #3

9 pages

Exam 1

Exam 1

12 pages

EXAM 1

EXAM 1

13 pages

Exam 1

Exam 1

12 pages

Test 2

Test 2

13 pages

Test 1

Test 1

6 pages

Chapter 1

Chapter 1

56 pages

Test 2

Test 2

22 pages

Test 1

Test 1

5 pages

TEST 2

TEST 2

16 pages

Chapter 1

Chapter 1

56 pages

Notes

Notes

18 pages

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