Bảo hiểm - Chapter 10: Analysis of insurance contracts

Chapter 10Analysis of Insurance ContractsAgendaBasic parts of an insurance contractDefinition of the “Insured”Endorsements and RidersDeductiblesCoinsuranceOther-insurance provisionsBasic Parts of an Insurance ContractDeclarations are statements that provide information about the particular property or activity to be insuredUsually the first page of the policyIn property insurance, it contains name of the insured, location of property, period of protection, amount of insurance, premium and deductible informationInsurance contracts typically contain a page or section of definitionsFor example, the insured is referred to as “you”Basic Parts of an Insurance ContractThe insuring agreement summarizes the major promises of the insurerThe two basic forms of an insuring agreement in property insurance are:Named perils policy, where only those perils specifically named in the policy are covered“All-risks” policy, where all losses are covered except those losses specifically excludedMay also be called an open-perils policy or special coverage policyInsurers have generally deleted the word “all” from policies“All-risks” coverage has fewer gaps, and the burden of proof is placed on the insurer to deny a claimBasic Parts of an Insurance ContractInsurance contracts contain three major types of exclusionsExcluded perils, e.g., flood, intentional actExcluded losses, e.g., a professional liability loss is excluded in the homeowners policyExcluded property, e.g., pets are not covered as personal property in the homeowners policyWhy are Exclusions Necessary?Some perils are not commercially insurablee.g., catastrophic losses due to warExtraordinary hazards are presente.g., using the automobile for a taxiCoverage is provided by other contractse.g., use of auto excluded on homeowners policyMoral hazard problemse.g., coverage of money limited to $200 in homeowners policyAttitudinal hazard problemse.g., individuals are forced to bear losses that result from their own carelessnessCoverage not needed by typical insuredse.g., homeowners policy does not cover aircraftBasic Parts of an Insurance ContractConditions are provisions in the policy that qualify or place limitations on the insurer’s promise to performIf policy conditions are not met, insurer can refuse to pay the claimInsurance policies contain a variety of miscellaneous provisionse.g., cancellation, subrogation, grace period, misstatement of age Definition of an “Insured”An insurance contract must identify the persons or parties who are insured under the policyThe named insured is the person or persons named in the declarations section of the policyThe first named insured has certain additional rights and responsibilities that do not apply to other named insuredsA policy may cover other parties even though they are not specifically namede.g., the homeowners policy covers resident relatives under age 24 who are full-time students away from homeAdditional insureds may be added using an endorsementEndorsements and RidersIn property and liability insurance, an endorsement is a written provision that adds to, deletes from, or modifies the provisions in the original contracte.g., an earthquake endorsement to a homeowners policyIn life and health insurance, a rider is a provision that amends or changes the original policye.g., a waiver-of-premium rider on a life insurance policyDeductiblesA deductible is a provision by which a specified amount is subtracted from the total loss payment that otherwise would be payableThe purpose of a deductible is to:Eliminate small claims that are expensive to handle and processReduce premiums paid by the insuredUnder the large loss principle, insurance should pay for high severity losses; small losses can be budgeted out of the person’s incomeReduce moral hazard and attitudinal hazardDeductiblesWith a straight deductible, the insured must pay a certain amount before the insurer makes a loss paymente.g., an auto insurance deductible An aggregate deductible means that all losses that occur during a specified time period are accumulated to satisfy the deductible amountDeductibles in Health InsuranceA calendar-year deductible is a type of aggregate deductible that is found in basic medical expense and major medical insurance contractsA corridor deductible is a deductible that can be used to integrate a basic medical expense plan with a supplemental major medical expense planAn elimination (waiting) period is a stated period of time at the beginning of a loss during which no insurance benefits are paidCoinsuranceA coinsurance clause in a property insurance contract encourages the insured to insure the property to a stated percentage of its insurable valueIf the coinsurance requirement is not met at the time of the loss, the insured must share in the loss as a coinsurerCoinsuranceThe purpose of coinsurance is to achieve equity in ratingA property owner wishing to insure for a total loss would pay an inequitable premium if other property owners only insure for partial lossesIf the coinsurance requirement is met, the insured receives a rate discount, and the policyowner who is underinsured is penalized through application of the coinsurance formulaExhibit 10.1 Insurance to Full Value Exhibit 10.2 Insurance to Half Value Coinsurance in Health InsuranceHealth insurance policies frequently contain a percentage participation clauseThe clause requires the insured to pay a certain percentage of covered medical expenses in excess of the deductibleThe purpose is to reduce premiums and prevent overutilization of policy benefitsOther-insurance ProvisionsThe purpose of other-insurance provisions is to prevent profiting from insurance and violation of the principle of indemnityUnder 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 propertyUnder 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 paidExhibit 10.3 Pro Rata Liability ExampleExhibit 10.4 Contribution by Equal Shares (Example 1)Exhibit 10.5 Contribution by Equal Shares (Example 2)Other-insurance ProvisionsUnder 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 exhaustedThe 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 plane.g., two employed spouses are insured as dependents under each other’s group health insurance plan