My Insurance Policy

My Insurance Policy – What is a Policy? Continued

Recently, MyInsurancePolicy gave you a brief overview of what an insurance policy, or insurance contract, sets out to define with the relationship between the insurer (insurance company) and the insured (the policyholder, you!). The previous post also went over the five basic parts of a insurance policy: Definitions, Insuring Agreement, Declarations, Exclusions, and Conditions.

Aside from the parts of the insurance policy, there are also some general features you should be aware of – outlining these features gives better perspective of the characteristics of an insurance contract, and how that might relate to you as a consumer.

• Insurance policies are generally considered contracts of adhesion; this basically means that the insurance company creates and defines the contract, and the customer has little or no ability to make substantial changes to it. Because of this, it also means that the customer is given “the benefit of the doubt” if there are any unclear terms within the contract.
• Insurance contracts are aleatory; this indicates that the money exchanged by you and the company are unequal – and this works from both sides. Let’s say you pay in premium and never file a claim. This obviously illustrates your payments are unequal to any claims payout because there is no payout. On the other hand, if you were to file a claim, it’s possible that the damages that are paid for might exceed what you have paid into the policy – again unequal exchange.Of course, this also leads to the fact that damages must occur under uncertain future events, so that the unequal exchange keeps the agreement fair. You can not purchase insurance – nor will a company sell you a policy – that covers for losses that have already occurred or those are almost certain to happen. Easy example: You can’t buy an insurance contract to cover gambling losses in Vegas!
• Insurance contracts are unilateral; meaning that only the insuring company makes legally enforceable promises in the contract. This concept is a bit complex, but we’ll try to explain. A standard contract is enforceable by law, forcing BOTH parties to meet their agreed obligations; however, under an insurance contract, a customer cannot be forced to pay premiums (although the policy may be cancelled if you don’t), yet the insurance company can be legally forced to pay the benefits under the contract (as long as the policyholder has paid the premiums and met certain other basic provisions).Without wanting to seem redundant, if you don’t pay the insurance premium, you just get cancelled. No court order, no one will sue. Yet, if you took care of your end and the insurance company won’t pay the claim benefit, they need to get ready to meet with your attorney!
• Lastly for today, insurance contracts are governed by the principle of utmost good faith; this requires both parties contract to deal in good faith (openly and honestly). The customer has a duty to disclose all known facts which relate to the possibility of risk being covered. In other words, you can’t leave out information which can reasonably affect the possibility of damage or loss.For example, you must inform the company if you have a young driver in the household (considered high risk) or perhaps you own a swimming pool that is unsecured (greater possibility of injury). On the other side, an insurance company uses the policy itself to disclose information necessary to the agreement of coverage.

Altogether, an insurance policy, once established, is literally there for your protection. This is not just for paying of your claims, but even the characteristics of the policy are set up in such a way to protect you from being ripped-off, but where the insuring company can stay in business!

Until next time…

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