Understanding Your Insurance Contract

There are so many types of insurance plans and they all come with different terms and conditions. Almost everyone has an insurance plan and it would be lovely to fully understand the terms involved in an insurance plan before getting into one. What we generally do when handed the insurance policy document is just to glance through it without fully understanding the whole terms involved. In difficult cases where you fail to understand the terms in an insurance contract, it is wise to call on your insurance advisor to help you understand some tricky terms that might be contained in the insurance form. This article aims at making you understand some basic principles and terms that might be contained in your insurance contract.

Insurance contract essentials

Offer: when you fill out the requested details of an insurance company’s proposal form and send it back to them (sometimes with a premium check). It is known as your offer.


Acceptance: if after reviewing your submitted form (offer) and the company finds it worthy of insuring you maybe with little changes to your proposed terms, it is known as acceptance.


Consideration: this is the premium or future premium you are entitled to pay your insurance in the duration of your insurance plan. Consideration also refers to the amount of money to be paid to you should you file an insurance claim. Invariably. It means each party to the contract would have to provide some value to the relationship.


Legal capacity: it deals with your ability to go into an insurance contract with an insurance company. You need to be legally competent to reach an agreement with the insurance company. Being a minor or mentally ill limit your chances of entering into an agreement with an insurance company.


Legal purpose: your contract must not be to support illegal activities otherwise it is invalid.


Contract Values

Most insurance contracts are handled as indemnity contracts. The type of contract is such that the losses incurred in an insurance policy can be measured in terms of money. 


Principles of indemnity

The purpose of an insurance contract is to leave you in the same financial position you were in immediately before the incident leading to an insurance claim. The principle of indemnity states that insurers pay no more than the actual loss suffered. Invariably, it means that you will get compensated for your losses based on what you have accumulated over the years.


Under-insurance: most times, to avoid paying extra premiums, some individuals ensure their properties at a lesser amount. This is not healthy at all and should be avoided at all costs. If such an insurance premium strategy is undertaken, At the time of partial loss, your insurer will only pay the amount you gave for the property while you dig into your savings to cover the cost for the remaining portion of the loss.


Excess: this is a provision offered by the insurance company to take care of losses if it exceeds a set fee. For example, you have property insurance with the applicable excess of $7,000. Unfortunately, the property got damaged with a loss amounting to $9,000. The insurance company will pay you the $9,000 because the loss has exceeded the specified limit of $7,000. But, if the loss comes to $4,000 then the insurance company will not pay a single penny and you have to bear the loss expenses yourself.


Deductible: it is the amount of money you are expected to pay from out-of-pocket expenses before your insurance takes care of the remaining expenses. For example, if the deductible in your contract is $4,000 and you incurred a total insured loss of $17,000, your insurance company will only pay $13,000 while you pay $4,000. The higher the deductible, the lower the premium, and vice versa.

It is important to state that not all insurance plan functions as an indemnity contract. Contracts like most personal accident insurance contracts and life insurance contracts are non-indemnity contracts because life cannot be measured using money.


Insurable interest

 You have all the legal backings to insure any property or any event that may cause loss of money or legal liability for you in the future.

assume you are living in your uncle’s house, and you apply for homeowner’s insurance because you believe that you are likely to inherit the house later. Your request will be declined by the insurance company because you are not the owner of the house and, therefore, you do not stand to suffer financially in the event of a loss. When it comes to insurance, it is not the house, car, or machinery that is insured. Rather, it is the monetary interest in that house, car, or machinery to which your policy applies. This is called insurable interest.


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Principle of Subrogation

In the principle of subrogation, the insurer is allowed to sue a third party for losses caused and is allowed all legal methods towards getting back some of the money paid to the insured as a result of the loss.

For instance, if you get injured in a road accident as a result of reckless driving by another party, you will be compensated by your insurer. However, your insurance company may go on to sue the reckless driver in an attempt to recover that money spent.


The doctrine of good faith

when applying for insurance, it necessary that you provide relevant facts and information about yourself truthfully to the insurer. All insurance contracts are based on the doctrine of utmost good faith or the concept of uberrima fides. It emphasizes the presence of mutual faith between the insured and the insurer.


Duty of disclosure: it is very important that you provide all the necessary information that might influence the decision of the insurer in entering a contract with you. There are certain material facts that you are legally obliged to provide for your insurer to make a decision whether to insure you or not. Some of the material facts may include, previous losses and claims under other policies, insurance coverage that has been declined to you in the past, the existence of other insurance contracts, full facts, and descriptions regarding the property or the event to be insured.


Representations and warranty: in giving out details of your property to be insured, make sure the information is very correct. Most insurance firms require you to sign a declaration stating that all information provided on the form is true and complete. Representations are written statements made by you on your application form, which represent the proposed risk to the insurance company. Warranties on the other hand are imposed by the insurer to ensure that the risk remains the same throughout the policy and does not increase. For example, if in an auto insurance you lend your car to a friend who doesn’t have a license and that friend is involved in an accident, your insurer may consider it a breach of warranty because it wasn’t informed about this alteration and your claims could be rejected.


Other policy aspects

The doctrine of adhesion: it states that you must adhere to the entire insurance contract and all of its terms and conditions without bargaining because the insured has no opportunity to change the terms. Any ambiguities in the contract will be interpreted in his or her favor.


Principle of Waiver and Estoppel: A waiver is a voluntary surrender of a known right. Estoppel prevents a person from asserting those rights because he or she has acted in such a way as to deny interest in preserving those rights. Assuming you failed to provide some information in the insurance proposal form and your insurer didn’t request for that information but goes on to issue the insurance policy, it is known as a waiver. If in the future a claim arises, your insurer cannot question the contract on the basis of non-disclosure. This is known as estoppel and for this reason, your insurer will have to pay the claim.


Co-insurance is the sharing of an insurance by two or more insurance companies in an agreed manner. Some very big organizations may consider the risk of running the place to be very high and might decide to involve two or more insurance companies to share the risk. Coinsurance can also exist between you and your insurance company.


Reinsurance occurs when your insurer “sells” some of your coverage to another insurance company. Suppose you are a football star and you want your legs to be insured for $100 million. If insurance Company A accepts your offer and along the line couldn’t keep up with the risk management, it can decide to passes part of this risk say ($70 million) to Insurance Company B. Should you get an injury on your legs, you will receive $100 million from insurer A ($30 million + $70 million) with insurer B contributing the reinsured amount ($70 million) to insurer A. This practice is known as reinsurance.


It is wise to always seek the services of your insurance advisor when going through an insurance contract, he or she can shop around and make sure that you are getting adequate insurance coverage for your money. Always look out for vital information before signing any insurance contract. There may be times when your claim is rejected because you didn’t pay attention to certain information requested by your insurance company.


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