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Thursday, 7/24/2008
Understanding Insurance Contracts
Insurance
contracts follow the concept of offer and acceptance. You submit a
proposal to the insurance company and that is considered an offer. If
the company accepts your offer, that completes the process. The
premium is called consideration and forms a contract. There are
several principals you should know:
Principle of Indemnity - Protection against loss and/or
damages. The insurance company is bound by contract to pay when a
covered event occurs. The goal is to help an insured regain financial
position. In some indemnity contracts, the amount payable is limited
to actual economic loss. Other contracts may limit or not pay at all
if the actual loss is less than a certain amount. Auto insurance is a
good example. Assume a contract with $1000 deductible. In the event of
a claim, you would be responsible for the first $1000 and the
insurance company would pay after that. If the loss is equal to or
less that $1000, you would have to cover the entire amount.
Insurable Interest - You must have an interest in the object
being insured such that you will personally experience a loss if the
covered event occurs. For example, if you live in someone else's house
and apply for homeowners’ insurance, the insurance company will reject
the application because you are not the property owner and cannot
suffer a financial loss if the structure is damaged. This is the idea
behind renter's insurance. You can have your personal items covered -
as well as liability for the injury of others - without having to
insure the dwelling. If the building were to burn down, you would be
compensated for your covered items and the property owner would have
to file a claim with his/her insurance company to have the building
restored.
Principle of Subrogation - Allows the insurance company to
pursue legal actions against a third party to recover the amount of
loss paid for a claim. For example, if you are injured in an auto
accident due to the reckless driving of someone else, the insurance
company will compensate your loss and also sue the third party to
recover the money paid in the claim.
Doctrine of Utmost Good Faith - Both parties are expected to
disclose any information important to the contract. For example, when
applying for life insurance, it is your duty to disclose any permanent
ailments that you might have. Likewise, your insurer also is expected
to be clear on the illnesses that are not covered under the contract. |