Insurance Terms 3

Binders

A temporary insurance contract that may be verbal or written. A binder is deemed to include all usual terms of the policy for which it was given, plus endorsements.

Elements of a contract -

Consideration clause - An exchange of values (not necessarily equal). Consideration for the insured is the premium paid, and the answers contained in the application. For the insurance company, their consideration is their promise to provide coverage in return. Offer - Every legal contract must have a clearly communicated offer from one part to the other. Usually, when an applicant fills out the application and pays the initial premium, she is making an OFFER to purchase insurance from the insurer. Acceptance - If the insurance company issues the policy, they have made an acceptance of the applicant's offer and coverage is now in force. Of course, most P&C agents have BINDING AUTHORITY, which means that they can actually place coverage in force prior to the time the policy is issued by the company. Binders are considered temporary insurance policies to be superceded by the actual policy within a very short period of time. Legal Purpose and Capacity - Illegal contracts (for illegal purposes) are not enforceable in court. In addition, all parties to a contract must have legal capacity, which is defined as being of legal age (18) and not under the influence of alcohol or drugs. All of the elements must be present in order to have a valid contract of any type, including insurance policies.

Obligations of the insurance company

Found in the insuring agreement, the obligations of the insurance company will vary depending upon which policy is purchased. The insuring agreement states which losses will be covered, what property is covered, and which perils are insured against.

Declarations

Found on the first page of the policy. It contains the name of the insurance company (the first party) and the name of the insured (the second party). It also contains the address of the property covered and the policy limits.

Notice of claim

Line 90 of the Standard Fire Policy requires that the insured give immediate written notice to the company of any loss. This is a condition that applies to the insured. Immediate is defined to mean "as soon as reasonably possible".

Compliance with the provisions of the Fair Credit Reporting Act

No one may order a Consumer Investigative Report without the applicant's written permission, in advance. This is called pre-notification. To prevent abuse in consumer reporting, there is a federal law called the Fair Credit Reporting Act which requires pre-notification and post-notification. If the insurance company rejects an application or cancels a policy based on information they receive in one of these reports, they must advise the client of the specific reason for the rejection or cancellation and tell them which credit reporting agency supplied them with this negative information. The client then has the right to go to that consumer reporting agency (not the insurer) and request a free copy of their credit report. If the information contained in the report is incorrect, the consumer reporting agency must correct it.

Conditions

Normally contained in the 165 lines of text, the conditions apply both to the insured and the insurer. For example, it is the insurer's duty to protect the property from further damage. This is a condition.

Sources of Insurability Information

Of course, most information is gathered from the answers contained on the application. In addition, most applications have a section entitled Agent's Report for the agent to complete regarding the applicant. Also, many property insurance companies order actual inspections of properties to be insured, including photographs. Insurance companies also often order Consumer Investigative Reports, which contain personal information about the applicant's credit and character.

Mortgagee rights

Rights granted to a mortgagee (lender), under a property contract issued to a mortgagor, by virtue of the mortgagee's interest in the property. Mortgagee holders have the right to notice of cancellation, and the right to continue paying the premium themselves.

Proof of loss

The completed claims forms the insured is required to send back to the insurance company in connection with a pending claim. Normally, the company will send a particular form to be completed by the insured. If they don't, Proof of Loss may be reported to the company on any form.

Warranties, Representations and concealment

The insurance company will require that the applicant tell the "truth to the best of their knowledge" on the application, these are representations. Of course if the client knowingly lies, this is a MISREPRESENTATION. Material misrepresentations may have the effect of voiding the policy, if discovered. Warranties are guarantees of truth, such as the existence of a burglar alarms, or sprinkler system.

Duties of the insured after a loss

This is a condition also found in the 165 lines of text. It states that the insured must give immediate written notice of claim to the insurer, protect the property from further damage and furnish proof of ACV.

Appraisal

This is similar to arbitration, except arbitration applies to liability insurance and appraisal applies to property & auto insurance. If the insured and insurer fail to agree on the ACV or replacement cost of a claim, both sides may hire their own independent appraiser and bear that cost. The two appraisers then select a disinterested umpire and all the parties are bound by the decision of any of the 2 of the 3 parties involved.

Other Insurance Provision

This is sometimes called the Pro-Rata Liability Clause. This policy provision protects the insurance company against a client who purchases more than one policy on the same property. If a loss occurs, each policy will pay a proportionate share depending on what percentage its policy limits bears to the entire policy limits in force on all policies. This is in accordance with the principle of indemnity, which states that you cannot make a profit from insurance. Remember, pre-rata liability sharing is not necessarily equal.

Subrogation

This is when another party causes damages to your property. Your insurance company pays the claim, but then takes your right of recovery and sues the negligent other party to recover the money they paid out to you. They stand in your place. entitled to recover damages from the company.

Assignment

This is when the ownership of the policy itself is changed. For example, you sell your house and you (the assignor) assign your property insurance policy to the buyer (assignee). This may be done, but assignments are not effective until approved by the insurer and, in reality, are seldom done.

Insuring Agreement

This states what PERILS the property is covered for.

Definition of the Insured

This states who is covered on the policy. For example, on an HO policy, the definition of insured includes you, any relative residing in your household and any other person under the age of 21 who is in your care and residing in your household.

Exclusions

Usually listed in a separate section of the policy, this is a list of things that are NEVER covered, such as flood, war, earthquake, etc.