Insurance policy

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In insurance, the insurance policy is a contract (generally a standard form contract) between the insurer and the policyholder, which determines the claims which the insurer is legally required to pay. In exchange for an initial payment, known as the premium, the insurer promises to pay for loss caused by perils covered under the policy language.

Contents

Insurance contracts are designed to meet specific needs and thus have many features not found in many other types of contracts. Since insurance policies are standard forms, they feature boilerplate language which is similar across a wide variety of different types of insurance policies. [1]

The insurance policy is generally an integrated contract, meaning that it includes all forms associated with the agreement between the insured and insurer. [2] : 10  In some cases, however, supplementary writings such as letters sent after the final agreement can make the insurance policy a non-integrated contract. [2] : 11  One insurance textbook states that generally "courts consider all prior negotiations or agreements ... every contractual term in the policy at the time of delivery, as well as those written afterward as policy riders and endorsements ... with both parties' consent, are part of the written policy". [3] The textbook also states that the policy must refer to all papers which are part of the policy. [3] Oral agreements are subject to the parol evidence rule, and may not be considered part of the policy if the contract appears to be whole. Advertising materials and circulars are typically not part of a policy. [3] Oral contracts pending the issuance of a written policy can occur. [3]

General features

The insurance contract or agreement is a contract whereby the insurer promises to pay benefits to the insured or on their behalf to a third party if certain defined events occur. Subject to the "fortuity principle", the event must be uncertain. The uncertainty can be either as to when the event will happen (e.g. in a life insurance policy, the time of the insured's death is uncertain) or as to if it will happen at all (e.g. in a fire insurance policy, whether or not a fire will occur at all). [4]

Structure

Insurance contracts were traditionally written on the basis of every single type of risk (where risks were defined extremely narrowly), and a separate premium was calculated and charged for each. Only those individual risks expressly described or "scheduled" in the policy were covered; hence, those policies are now described as "individual" or "schedule" policies. [14] This system of "named perils" [15] or "specific perils" [16] coverage proved to be unsustainable in the context of the Second Industrial Revolution, in that a typical large conglomerate might have dozens of types of risks to insure against. For example, in 1926, an insurance industry spokesman noted that a bakery would have to buy a separate policy for each of the following risks: manufacturing operations, elevators, teamsters, product liability, contractual liability (for a spur track connecting the bakery to a nearby railroad), premises liability (for a retail store), and owners' protective liability (for negligence of contractors hired to make any building modifications). [17]

In 1941, the insurance industry began to shift to the current system where covered risks are initially defined broadly in an "all risk" [18] or "all sums" [19] insuring agreement on a general policy form (e.g., "We will pay all sums that the insured becomes legally obligated to pay as damages..."), then narrowed down by subsequent exclusion clauses (e.g., "This insurance does not apply to..."). [20] If the insured desires coverage for a risk taken out by an exclusion on the standard form, the insured can sometimes pay an additional premium for an endorsement to the policy that overrides the exclusion.

Insurers have been criticized in some quarters for the development of complex policies with layers of interactions between coverage clauses, conditions, exclusions, and exceptions to exclusions. In a case interpreting one ancestor of the modern "products-completed operations hazard" clause, [21] the Supreme Court of California complained:

The instant case presents yet another illustration of the dangers of the present complex structuring of insurance policies. Unfortunately the insurance industry has become addicted to the practice of building into policies one condition or exception upon another in the shape of a linguistic Tower of Babel. We join other courts in decrying a trend which both plunges the insured into a state of uncertainty and burdens the judiciary with the task of resolving it. We reiterate our plea for clarity and simplicity in policies that fulfill so important a public service. [22]

Parts of an insurance contract

Industry standard forms

In the United States, property and casualty insurers typically use similar or even identical language in their standard insurance policies, which are drafted by advisory organizations such as the Insurance Services Office and the American Association of Insurance Services. [33] This reduces the regulatory burden for insurers as policy forms must be approved by states; it also allows consumers to more readily compare policies, albeit at the expense of consumer choice. [33] In addition, as policy forms are reviewed by courts, the interpretations become more predictable as courts elaborate upon the interpretation of the same clauses in the same policy forms, rather than different policies from different insurers. [34]

In recent years, however, insurers have increasingly modified the standard forms in company-specific ways or declined to adopt changes [35] to standard forms. For example, a review of home insurance policies found substantial differences in various provisions. [36] In some areas such as directors and officers liability insurance [37] and personal umbrella insurance [38] there is little industry-wide standardization.

Manuscript policies and endorsements

For the vast majority of insurance policies, the only page that is heavily custom-written to the insured's needs is the declarations page. All other pages are standard forms that refer back to terms defined in the declarations as needed. However, certain types of insurance, such as media insurance, are written as manuscript policies, which are either custom-drafted from scratch or written from a mix of standard and nonstandard forms. [39] [40] By analogy, policy endorsements that are not written on standard forms or whose language is custom-written to fit the insured's particular circumstances are known as manuscript endorsements.

Related Research Articles

<span class="mw-page-title-main">Insurance</span> Equitable transfer of the risk of a loss, from one entity to another in exchange for payment

Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to protect against the risk of a contingent or uncertain loss.

<span class="mw-page-title-main">Life insurance</span> Type of contract

Life insurance is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of an insured person. Depending on the contract, other events such as terminal illness or critical illness can also trigger payment. The policyholder typically pays a premium, either regularly or as one lump sum. The benefits may include other expenses, such as funeral expenses.

Home insurance, also commonly called homeowner's insurance, is a type of property insurance that covers a private residence. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one's home, its contents, loss of use, or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.

Crop insurance is insurance purchased by agricultural producers and subsidized by a country's government to protect against either the loss of their crops due to natural disasters, such as hail, drought, and floods, or the loss of revenue due to declines in the prices of agricultural commodities.

<span class="mw-page-title-main">Property insurance</span> Insurance that protects against most risks to property

Property insurance provides protection against most risks to property, such as fire, theft and some weather damage. This includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance, or boiler insurance. Property is insured in two main ways—open perils and named perils.

Liability insurance is a part of the general insurance system of risk financing to protect the purchaser from the risks of liabilities imposed by lawsuits and similar claims and protects the insured if the purchaser is sued for claims that come within the coverage of the insurance policy.

Marine insurance covers the physical loss or damage of ships, cargo, terminals, and any transport by which the property is transferred, acquired, or held between the points of origin and the final destination. Cargo insurance a sub-branch of marine insurance, though marine insurance also includes onshore and offshore exposed property,, hull, marine casualty, and marine losses. When goods are transported by mail or courier or related post, shipping insurance is used instead.

Mortgage insurance is an insurance policy which compensates lenders or investors in mortgage-backed securities for losses due to the default of a mortgage loan. Mortgage insurance can be either public or private depending upon the insurer. The policy is also known as a mortgage indemnity guarantee (MIG), particularly in the UK.

Trade credit insurance, business credit insurance, export credit insurance, or credit insurance is a type of insurance policy and a risk management product offered by private insurance companies and governmental export credit agencies to business entities wishing to protect their accounts receivable from loss due to credit risks such as protracted default, insolvency or bankruptcy. This insurance product is a type of property and casualty insurance, and should not be confused with such products as credit life or credit disability insurance, which individuals obtain to protect against the risk of loss of income needed to pay debts. Trade credit insurance can include a component of political risk insurance which is offered by the same insurers to insure the risk of non-payment by foreign buyers due to currency issues, political unrest, expropriation etc.

Insurance bad faith is a tort unique to the law of the United States that an insurance company commits by violating the "implied covenant of good faith and fair dealing" which automatically exists by operation of law in every insurance contract.

Umbrella insurance is a kind of liability insurance. It typically applies when liability exceeds the limits of other policies, although it may also serve as primary insurance for losses not covered by other policies.

Insurance law is the practice of law surrounding insurance, including insurance policies and claims. It can be broadly broken into three categories - regulation of the business of insurance; regulation of the content of insurance policies, especially with regard to consumer policies; and regulation of claim handling wise.

Expatriate insurance are insurance policies that are designed to cover financial and other risks incurred specifically by expatriates while living and working in a country other than one's own. The insurances that expatriates need are similar to individuals living in the country but may be more complex to arrange because they are not native. There may also be specific risks for high-risk areas of the world where specialty insurance can provide coverage for war and terrorism, kidnap and ransom.

<span class="mw-page-title-main">Cumis counsel</span>

A Cumis counsel is "an attorney employed by a defendant in a lawsuit when there is a liability insurance policy supposedly covering the claim, but there is a conflict of interest between the insurance company and the insured defendant."

Builder's risk insurance is a type of property insurance which indemnifies against damage to buildings while they are under construction. Builder's risk insurance is "coverage that protects a person's or organization's insurable interest in materials, fixtures and/or equipment being used in the construction or renovation of a building or structure should those items sustain physical loss or damage from a covered cause."

Insurance in the United States refers to the market for risk in the United States, the world's largest insurance market by premium volume. According to Swiss Re, of the $6.782 trillion of global direct premiums written worldwide in 2022, $2.959 trillion (43.6%) were written in the United States.

Insurability can mean either whether a particular type of loss (risk) can be insured in theory, or whether a particular client is insurable for by a particular company because of particular circumstance and the quality assigned by an insurance provider pertaining to the risk that a given client would have.

In insurance policies, an additional insured is a person or organization who enjoys the benefits of being insured under an insurance policy, in addition to whoever originally purchased the insurance policy. The term generally applies within liability insurance and property insurance, but is an element of other policies as well. Most often it applies where the original named insured needs to provide insurance coverage to additional parties so that they enjoy protection from a new risk that arises out of the original named insured's conduct or operations. An additional insured often gains this status by means of an endorsement added to the policy which either identifies the additional party by name or by a general description contained in a "blanket additional insured endorsement".

Insurance in South Africa describes a mechanism in that country for the reduction or minimisation of loss, owing to the constant exposure of people and assets to risks. The kinds of loss which arise if such risks eventuate may be either patrimonial or non-patrimonial.

In law, the duty to settle is an insurer's implied obligation to accept a settlement in a case against one of its insured parties if it is likely that a potential judgement against the insured will exceed policy limits. If a liability insurer exposes the insured to excess risk by failing to settle within policy limits, they may be liable for any damages incurred.

References

  1. ↑ Mowbray, Albert H.; Blanchard, Ralph H. (1961). Insurance: Its Theory and Practice in the United States (5th ed.). New York: McGraw-Hill. pp. 48, 51, 71. Available through HeinOnline.
  2. 1 2 3 Wollner KS. (1999). How to Draft and Interpret Insurance Policies. Casualty Risk Publishing LLC.
  3. 1 2 3 4 Porter K. (2007). The Legal Environment of Insurance, §5.17. AICPCU.
  4. ↑ Mowbray, Albert H.; Blanchard, Ralph H. (1961). Insurance: Its Theory and Practice in the United States (5th ed.). New York: McGraw-Hill. p. 54. Available through HeinOnline.
  5. ↑ Rahdert MC. (1998). Reasonable Expectations Revisited Archived 2016-10-20 at the Wayback Machine . Conn. Ins. Law Journal.
  6. ↑ Hadland v. NN Investors Life Ins. Co., 24 Cal. App. 4th 1578, 30 Cal. Rptr. 2d 88 (1994). However, what constitutes a conspicuous, plain, and clear exclusion from coverage was later interpreted narrowly in favor of the insured by MacKinnon v. Truck Ins. Exchange, 31 Cal.4th 635, 3 Cal.Rptr.3d 228, 73 P.3d 1205, 1216 (2003).
  7. ↑ St. Paul Fire & Marine Insurance Co. v. Albany County School District No. 1, 763 P.2d 1255 (Wyo. 1988).
  8. ↑ Standard Venetian Blind Co. v. American Empire Ins. Co., 503 Pa. 300, 469 A.2d 563 (1983).
  9. 1 2 Mowbray, Albert H.; Blanchard, Ralph H. (1961). Insurance: Its Theory and Practice in the United States (5th ed.). New York: McGraw-Hill. p. 53. Available through HeinOnline.
  10. 1 2 Clore, Duncan L. (1998). Financial Institution Bonds (2nd ed.). Chicago: American Bar Association. p. 431. ISBN   9781570736209.
  11. ↑ Mowbray, Albert H.; Blanchard, Ralph H. (1961). Insurance: Its Theory and Practice in the United States (5th ed.). New York: McGraw-Hill. p. 69. Available through HeinOnline.
  12. ↑ Mowbray, Albert H.; Blanchard, Ralph H. (1961). Insurance: Its Theory and Practice in the United States (5th ed.). New York: McGraw-Hill. p. 61. Available through HeinOnline.
  13. ↑ Anderson, Eugene R.; Stanzler, Jordan S.; Masters, Lorelie S. (1999). "§ 11.01, Introduction". Insurance Coverage Litigation (2020 supp. ed.). Wolters Kluwer. p. 11-6. ISBN   978-0-7355-1173-6.
  14. ↑ Anderson, Eugene R.; Stanzler, Jordan S.; Masters, Lorelie S. (2013). Insurance Coverage Litigation (2nd ed.). New York: Wolters Kluwer. p. 1–32. ISBN   9780735511736 . Retrieved 9 August 2022.
  15. ↑ Corban v. United Services Auto. Ass'n , 20 So.3d 601 (Miss. 2009) (analyzing "named perils" coverage).
  16. ↑ Vision One v. Philadelphia Indem. Ins. Co. , 174 Wash. 2d 501, 276 P.3d 300 (2012) (analyzing "named perils" and "specific perils" coverage).
  17. ↑ Anderson, Eugene R.; Stanzler, Jordan S.; Masters, Lorelie S. (2013). Insurance Coverage Litigation (2nd ed.). New York: Wolters Kluwer. p. 1–31. ISBN   9780735511736 . Retrieved 9 August 2022.
  18. ↑ Intermetal Mexicana v. Insurance Co. of North America , 866 F.2d 71 (3d Cir. 1989) (analyzing "all risks" coverage).
  19. ↑ JH France Refractories Co. v. Allstate Ins. Co. , 626 A.2d 502, 534 Pa. 29 (1993) (analyzing "all sums" coverage).
  20. ↑ Stempel, Jeffrey W. (2007). Stempel on Insurance Contracts (3rd ed.). New York: Aspen Publishers. pp. 2–113–2–116. ISBN   978-0735554368.
  21. ↑ Baker v. National Interstate Ins. Co. 180 Cal. App. 4th 1319, 103 Cal. Rptr. 3d 565 (2009). This case explains how the modern clause more clearly excludes both the "products" and "completed operations" hazards as separate things (i.e., each hazard is separately excluded), as opposed to the prior version which was held to apply only when both hazards were present.
  22. ↑ Insurance Co. of North America v. Electronic Purification Co. , 67 Cal. 2d 679, 63 Cal. Rptr. 382, 433 P.2d 174 (1967).
  23. ↑ Mowbray, Albert H.; Blanchard, Ralph H. (1961). Insurance: Its Theory and Practice in the United States (5th ed.). New York: McGraw-Hill. p. 73. Available through HeinOnline.
  24. ↑ Mathias, Jr., John H.; Shugrue, John D.; Thomas A., Marrinson; Daniel J., Struck (2006). "§ 1.01, Components of an Insurance Policy". Insurance Coverage Disputes. New York: Law Journal Press. p. 1–2. ISBN   1588520757 . Retrieved 8 March 2017.
  25. 1 2 3 Mastin, John M.; Nelson, Eric L.; Robey, Ronald G. (2020). Smith, Currie & Hancock's Common Sense Construction Law: A Practical Guide for the Construction Professional (6th ed.). Hoboken, New Jersey: John Wiley & Sons. p. 541. ISBN   9781119540175 . Retrieved January 15, 2024.
  26. 1 2 3 Mathias, Jr., John H.; Shugrue, John D.; Thomas A., Marrinson; Daniel J., Struck (2006). "§ 1.01, Components of an Insurance Policy". Insurance Coverage Disputes. New York: Law Journal Press. p. 1–6. ISBN   1588520757 . Retrieved 8 March 2017.
  27. ↑ Mowbray, Albert H.; Blanchard, Ralph H. (1961). Insurance: Its Theory and Practice in the United States (5th ed.). New York: McGraw-Hill. p. 72. Available through HeinOnline.
  28. ↑ Mathias, Jr., John H.; Shugrue, John D.; Thomas A., Marrinson; Daniel J., Struck (2006). "§ 1.01, Components of an Insurance Policy". Insurance Coverage Disputes. New York: Law Journal Press. p. 1–5. ISBN   1588520757 . Retrieved 8 March 2017.
  29. ↑ Mowbray, Albert H.; Blanchard, Ralph H. (1961). Insurance: Its Theory and Practice in the United States (5th ed.). New York: McGraw-Hill. pp. 73–74. Available through HeinOnline.
  30. ↑ Mowbray, Albert H.; Blanchard, Ralph H. (1961). Insurance: Its Theory and Practice in the United States (5th ed.). New York: McGraw-Hill. p. 65. Available through HeinOnline.
  31. ↑ Mathias, Jr., John H.; Shugrue, John D.; Thomas A., Marrinson; Daniel J., Struck (2006). "§ 1.01, Components of an Insurance Policy". Insurance Coverage Disputes. New York: Law Journal Press. p. 1–7. ISBN   1588520757 . Retrieved 8 March 2017.
  32. ↑ "Pricing Medical Expense Insurance," in Medical Expense Insurance, (Washington: The Health Insurance Association of America, 1997), 89.
  33. 1 2 Impact of the Abolition of McCarran-Ferguson Antitrust Exemption for the “Business of Insurance” Archived 2014-07-14 at the Wayback Machine . CRS.
  34. ↑ Boardman M. (2006). Contra Proferentem: The Allure of Ambiguous Boilerplate. Michigan Law Review.
  35. ↑ Policy Issues: ISO Program Revisions. PropertyCasualty360.
  36. ↑ Schwarzc D. (2011). Reevaluating Standardized Insurance Policies Archived 2016-03-04 at the Wayback Machine . The University of Chicago Law Review. See also: Not All Homeowners’ Policies Are Alike. New York Times.
  37. ↑ E&O Insights: Directors & Officers Liability Is Not Your Normal Insurance Product. Insurance Journal.
  38. ↑ Time To Standardize Personal Umbrella Insurance Policies. IRMI.
  39. ↑ Dart Industries, Inc. v. Commercial Union Insurance Co. , 28 Cal. 4th 1059, 124 Cal. Rptr. 2d 142, 52 P.3d 79 (2002).
  40. ↑ Mathias, Jr., John H.; Shugrue, John D.; Thomas A., Marrinson; Daniel J., Struck (2006). "§ 1.03, Types of Insurance Policies". Insurance Coverage Disputes. New York: Law Journal Press. p. 1–16. ISBN   1588520757 . Retrieved 8 March 2017.
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