CHAPTER 10 ANALYSIS OF INSURANCE CONTRACTS “Le'hilol the lawyers" Weir hakespsre Pemerneancs After studying this chapter, you shouldbe abe to ldentify the basic pats of any insurance contrat. (Esplin the meaning of an “insured! in an insurance contrac © Describe the common types of deductibles that appear in insurance Suright deductible Calendatyear deductible © Epain how coinsurance works in a property insurance contrac Show how coinsurance work ina hedlth insurance contract. © Explain how repaid when more than one insurance contact covers the sameti, age 30, ico physician assistant in Oakland, CA. She purchased @ home for $550,000. Shorty after she maved in, an earthquake occurred, and the home sustained alse of $50,000. Kristi was upset when the claim adjustor od he thet her homeowners policy would not cover the loss. Like most insureds Kristi made the ‘common mistake ofnat reading her homeowners policy before alos occured. As @ result, she wos not aware of the major policy exclusions, including the exclusion of carthquakes Arist isnot alone, Mest people donot reed or understand the contractual ‘provisions tha appear in thei insurance policies Individuals typically own several insurance polices, including auto ond horsowners insurance as well as ife and Keith insurance. These policies are complex legal documents that reflect the legal principles dizeussed in Chapter 9 ‘Although insurance contracts are not identes, they contin similar contractual ‘provisions. This chapter discusses the basic parts ofan insurance policy, the meoning ‘of an “insured, "endorsements and riders, deductibles, coinsurance, and other- Jnsuronce provisions. Grasping these topes will provide you witha foundation fora better understanding of specifi insuronce contracts discussed later inthe text BASIC PARTS OF AN INSURANCE CONTRACT Despite their complexities, insurance contracts gen erally can be divided ico the following parts 1 Dechiations = Definiions 2 Iasuring ascement clusions = Conditions ‘= Micellaneos provisions Although all insurance contaes do not neces sarily coatain all six parts inthe order given here, such a clissifeation provides 2 simple and con venient framework for analyzing most insuance Dedaratons “The declarations section isthe fist part ofan insu ance contract. Delaratonsare statements that pro side information about the panicalar propery or 196 activity to be insured. Information contained inthe declarations section i used for underwriting andra ing purposes and for identification ofthe propery or activity that isinsned The declarations section usu- ally canbe found onthe fst page ofthe policy or on policy insert In property insurance, the delaation page ryp- ically contains information concerning the ientfca- ‘ion of he insures, name ofthe insured, locadon of the property, period of proxeton, amoune of insur ance, amount of the premium, sae ofthe deductible (any), and osber relevant infoumation. In ie insu nce, although the ist page ofthe policy rechnieally is not called a declarations page, contains the in suted’s name, age, premium amount, sue dats, and policy number Defnitions Insurance contracts ypicalycostaina pager section of definitions. Key words or phrases have quotation marks (*.") around them or are in boldiace type For example the ineurer is frequently refered t0 a8"we," “oug” ous." The named insured is eferred 0 “you” and “yous” The purpose ofthe various Aefntions is to define clearly the meaning of key swords orphrasesso thateoverage under the polieycan ‘edetermineel marca Insuring Agreernent “The insuring agreement i he hear of a insrance coms. The insuring agreement stomnarizet the major promises ofthe insurer. The insues, in other words, agrees to do certain things, suc as paying Joss from covered penis, poviing certain services Usuch as loss eevention services) oF agrecing 10 defend the insred in a ily lawsuit ‘There are wo bai forms ofan insuring ages meme in popery insurance: (1) named- pes cover age and (2) “alsisks” coverage, Under anamed-per- is policy, only those pers specially named in the poly are covered the penis not named not covered. For example, in the homeowners policy personal prope is covecd or relight, win! and cerain other named penis. Only loses by thee perl recovered. Flood damage i noe covered because fod isn a listed pes Under an *lbssks" policy al loses are cov cred excap those loses specifically excluded, An “allssks" policy i ako clled an opemperis plicy and special coverage policy. I the los is nae exclude then it is covered, Fr examol, the physi cal daoge secon ofthe personal auto policy cov cxsloses toa covered auto, Thus, ia smoker burss ‘hol inthe upholstery or» bearin a national pack damages the Vnyh 1p ofa covered auto he losses would be covered because he are not excluded “Alliss” coverage is geneally preferable co sane peis coverage, beease the protection is broader with fewer gaps in coverage. te loss i not excoded, then itis covered. In addition, 3 sear harden of proofs placed on te insure co deny a els. To deny payiet, se inser must prove that te los i excaded, bn comtas, wader 2 named perils contac, the burden of proof ison the snsuad to sbow tat the les was canied bya named teri Insurer and rating oeasistions generally have Aeleted te word alin ee “all sks” policy forms ‘oc are using peiltrmiacegy In he homeowners policy ated by the Insurance Services Offi, the GASIC PARTS OF AN INSURANCE CONTRACT 195 plas “risk of divcr physical los to property" i now vsed instead of the tem “alls.” However, ‘his term interpreted to mean tat all asses othe described. deling and other sutures ae eovered excep those ksses specifically exclude. Likewise the Insurance Services Office as drafted a special: sausesoflss form that 16 used in commercial property inssance. Once again, his terminology is Interpreted to mean tat loses are covered except those loses exclude. The debtion of any reference so “allsids"isincended wo aid ercating unteasom abl expectations ameng polzyouner that te pol icy covers loses, even hos oss that ae specie cally excluded. Sie insurance is anothr example of an “all tisk poi, Mos if isurance contracts cover al causes of death whether by accident or by disease. “The major exclasons are suicile dvi the Sst (wo years of the contae; certain aviation, hazard ex- laxions, suchas miitary fying, crop dusting, or sports piling; and in some contacts, death caused by war Exclusions Exclosions are another basic part of any insurance contract, Thete are eee maior types of exclsions: cluded pens, excluded losses, and excluded Proper. Exduded Povils The contract may exclude certain pets, or uses of os. In a homeowners policy, he peril of lod, earth maveren, and maces rida ‘ion of radioactive contamination are specifically ‘excluded. In the physical damage section of che pec sonal auto policy, loss to a covered auto is spel cally excl if the ear is used as a public ex. In property and liability insurance, mos insurance con tracisenclue coverage for intentional acts Excluded Losses Cersain ypes of losses may be ‘excloded. For example, ina hameowers policy, fi ure of an insured to protect the propecty fram far ther damage afer 3 loss occas excluded. Ia the penal lability section of a homeowners policy, Faby lawsuie arising out of the operation of sa sutomobile is excluded. Profesional ability lxsos are also excludeds 2 specific profesional ability poli is needed to cover his exposure196 CHAPTER 10 / AMALYSIS OF INSURANCE CONTRACTS Excluded Property. The contcact may exclude or lace limitations on the coverage of certain prope For example, ina homeowners policy, certain types ‘of personal property are excluded, such as cas, planes, animals bids, and fish, Reasons for Excisions xchsions are necessary forthe following reasons 1 Some pers considered uninsurable 1 Presence of extraordinary hazards 1 Coverage provided by other contracts 1 Moral hazard problems 1 Coverage nt needle by typical insuede rclusions are necessary because the peril may be considered sminsurabe by comarercial insures, A given perl may depart substantially. fom the reqisements of an insurable risk, as discussed in ‘Chapter 2. For example, most proptty and casualty insurance contracts exclude losses for potential eato~ strophic events such 95 war or exposure to nuclear radiation, A health insurance contract may exclude losses within the dizer control af the insured, such 38 an intentional, selina injury. Fall, pre Airable declines inthe value of property, such as wweae and tar and inherent vice, ate no insure “Inherent vce” refers co che destruction or damage of propery withour any tangible external force, uch asthe endency of fruit co ror and the tendency of diamonds ta cack. Exclusions are also used because extraordinary Inacards ave present. 8 azard isa condition that increases the chance of loss or severity of los Because of an extraordinary increase in hazard, a loss may be excluded. For example, the premium for lability insurance unde the personal auto policy is based on che assumpeion thatthe cari sed for pe sonal and recreational use and not 26 a taxi. The chance ofan acident, nd a resulhing lb law sl is much higher ifthe car is wsed asa taxi for Die, Therefore, to provide coverage fora tai atthe same premium rate fora Samily car could eeslt in ‘inadequate premiuns forthe insurer and unfair ate discrimination against oer insureds who age not sing thec vehicles as ta Eclasions are also necessary because conerge can be beter provided by other contracts, Excl sions are used 0 avoid duplication of coverage and to limit coverage tothe policy best designed co peo vide it. Fo example, caisexchaded under a home- owners policy because i is covered under the per sonat auto policy and oxher auro insorance com teats. If bth polices covered the loss, there would be unnecessary duplication. Tn addition, era property is excluded because of moral hazard or difculty in determining and ‘mecsaring the amount of loss For example, home- owner contracts drafted by the Insurance Services Oe limi the coverage of money to $200, If une: ited amounts of money were covered, fraudulent claims would increase, Alo, loss-adjustment peo lems in determining the exace amoune of the loss would also increase. Thus, cause of moral hazard, ‘exclusions are used. Finally excisions are used because the coverage Is not needed by the ryplal insured. For example, most homeowners do not own private planes. To cover aircraft as personal property unde the home- ‘owners policy would be grossly ualair tothe vast majority of insureds who do not own planes because premiuns would ke subscancally high, Conditions Conditions ae another important pat of an insu ance corer. Conons ae pro'sions in he po cy tha gua or place litaions om the insurer’ promise to perforin fe, the conitons section imposes certain des onthe insured, I the policy condions ae ot et the insurer ean rset 7 the cli, Common policy conditions include noty- ing the inser if les ecw, pret the pop er after loss, preparing an inventory of damaged personal propery, and cooperating withthe inser ‘nthe even lability su Miscellaneous Provisions Insurance contraes also contsin a number of mis cellaneous provisions. Tn. property and. casualty insurance, miscellaneous pcovisions ince cancel- lation, subrogation, requirements if a loss occurs, assignment ofthe policy, and other insurance provi sions. In ile and heal imsucance, eypicl miscela neous provisions include the grate period, reinstate ‘meat ofa lapsed policy, and misstatement of age. Derails ofthese prcvisions ae discussed later inthe text when specie insurance contacts ue aralyzedDEFINITION OFTHE “INSURED” Insurance contracts typically contin «definition of the “insured” under the policy. The eontrace must indicate the person or persons for whom the protec- tions provided. Several possibilies exist concerning ‘he persons uo ae insured une che poli. First, some policies insure only one gerson. For example, in mos life insurance contacts, only ont person is ‘speiically named as insured unde the policy, Second the policy may contain a formal defini- tion ofthe named insored, The amd insted sche person or persons named inthe declarations Section ofthe pelicy, For example in a homeowners pois the named insured includes che person oamed in the declarations page and hisorher spouse i resident of the same household. Thus, Nicole may be the DEFINITION OF THE “INSURED" 197 ‘named insured under 3 homeowners policy By def nition, her husband is also included as named Insured as long a he resides inthe same household ‘The policy may alo cover other partes even though they ae nor specifically nansed inthe policy For example in addition to che named insured, 2 homeowners policy covers resident relatives of the named insured r spouse andany person underage? vwbo isin te care ofan insure, such a a foreign ‘exchange student, The homeowness policy lso co ers resident relatives underage 24 who are fll-time students and avay from home. The personal auto policy covers the named insured and spouse, esident relatives and any othe person using the aro withthe petmission of he named insure (se Insight 10.3) In shor, a conrace may provide broad coverage with respect to the number of persons who are insured under the policy Will Your Auto Insurance Cover You ‘When You Drive Another Person's Car? Cogent equnty becuse cuedy om reson is lpr ita ante oro eno iveanoerpersesca Likes you ay ghapemasson teyoureormatee end de art eybutvcrrate Ferd coved ude our poli To nse these qu tom we mustistenming the defnton ofp aved li bly coverage appari th 205 area Aa Ply. “tod odin ti Po ms 1 ovary aml meri omar near ase sanyo” pein ing cove a” “ou coed et ry pan or ean bat nlite tol epebiy o r ominore foponn fbn eee ied ee isa eat Ye” che than pure ot” ‘any ct pece ean bt th eg 2 ea exe fr ator mos fou ear Ye Iie fr com cage afd ude Po Ts pon ops apf te pes00 or sion eset. oie heat orl” For example, chs ad fares Swift ae the rama eds unr the Pon Aus Pay at conn He be prin, The sn Patch, sina calege ero ig he etl yar hie ay fom hoe top he Soeretine shore cre heer ly abr Sie the calee ss tmporn ard ered hs pares’ home ahs perraerreeceaiess Pick dives 3 Monde edn Me pene’ names. cca ei fay membe; hess anid under ‘he pal, Wat happen Batch stow he pnd to we he Honda? Aah hes ot ay ber, he sevens quis a8 “any pion wing you ered Se Thus te ind ian res \wha Pack carat die is roommate’ ca? Thecars ot fished rhs eguarwseAssuming Pack 153 fami eter ude is pen pay he sina vile in ny nda eos Sat Fin assure Ut Pate noid in sau ae ort wie eng Thang ed sets fr os chant Thine pty be bth Pabickand he chatable ‘xpintion Pacey med ndiacond the ‘hay lo ania er i's pole The rome Jet The dnion of aud vende coverage 9 an e204 rerinasionwo sea esponsbie fran acs rors Slob an ina, Ty, he cbariibe rant sco Sire a steed. atc’ ise etter he hay intesse teen OS PeiYE CHAPTER 10 / ANALYSIS OF INSURANCE CONTRACTS ENDORSEMENTS AND RIDERS Trance contacts fequenty contain endorsements and riders. The ters endorsements and riders are often used interchangeably and mean se same hig. Jn propesty an casualty imsurance, an endorsement {sa written provision that adds to, deletes from, or modifies the provisions in abe original contract. bt ie and bead insurance, rider 2 provision that amends or changes the original policy ‘There are numerous endorsements in property nd eassky insurance tht modify, extend, or dle Provisions found in che original poly. For example, 4 homeowners policy excludes coverage for earth auakes. Howeves, an earthquake endorsement can beaded chat covers damage from an earthquake or From eath movement Tn fife and health insurance, numerous riders an be added that increase oz decease benefit, waive & condition of coverage present in the original poli, ‘oramend the basic policy. For example, & waiverof- premium rider can beaded toa life insurance pol- icy. the insured becomes totaly disabled, all ature premiums are waived after an elimination period of ‘9x months, as long a the insured remains disabled according othe terms of herder ‘An endorsement avached 10 athe policy gene ally takes pecedence aver any cosfling rms inthe poli. Also, many polices have endorsements that amend he poi to confoum to given state's ave DEDUCTIBLES A deductible is common policy provision that re ‘quires the insured co pay part of the loss. A de- ‘dctble isa provision by wbich a specified amount is subtracted from the total loss payment that coher wise would be payable. Deductiles typically are found in property, health and aut insurance con- tracts, A-dedactble i moe wsed in hife insurance Fecause the insureds death is akwaysa tral loss, and 4 deductible would simply reduce the face amount of insurance, Also deductible generally isnot used in personal ibility insueancehecase the iosurer must provide « pa defense ven for 2 small clair, The Inter wants tobe involved from the frst ollar of fosss0 to minimizes ultimate lily for acai. Also, the premium reduction that would result from small deductible in personal yes of hid-patyia- biy coverages would be celsively smal,” Purposes of Deductibles Deducsibles have several important purpose. They include the following ¥ Todliminat small claims fo educe premiums 1 To ceduce moral and morale azaed A deduatleeininaes small cams tht ae extensive to handle and proces, For example, an insurer cs easly incu expenses oF $800 or mae in pressing 3 $100 cain, Because a deduce ii ras small dims, the insuerslos-adustment capeons ace edaced Daicubles are ako wed 10 reduce prenitons pail by the insured. Because dedi eliminate Sal cis, peiamscan be subsancly edued Insurance soe an appropri tecaiqu or paying small ses that canbe bree budgeted ou of per- Soral o busines income. Insicance should be wed to cover large catastrophic events, such 35 medial expenses af $50,000 oe more fom an extended cer minal less Insurance that pete aginst acta stropic los canbe purchased more economically edibles ace used This coacep of wing isueance premiums co pay for lange loses eater than for smal les soe called he largess princi The objetivo coves large lose that can fare cially tio an individsal and exclde small loses that ean be badgeced out ofthe person’ income Other factors beng eg, lnge deductible it pefecible to 2 small one. For example, many ‘motrss wth auto insurance have polices that conain $250 deduct fells asses instead of 2 $500 or larger deductible, They may not be amare ofhow expensive the exes insurance ells For example, assume you can purchase collision insurance on your car with a $250 deductible with an anal premium of $800, while a poicy wth 3 $500 deductible hasan annual reniom of $800. IF you select the $250 daducble over the $500 deductible, you have an addtional 250 of olision insucanee, bu you mus pay an addtional $100 in annua premiums. Using simple cost beef analy sis, you ate paying an ational $100 for an ad tional $280 of insurance, which i ¢reaively ex pensive incement of insurance, When analyaed inthis mans, eger deductibles are preferable co smaller deductibles. Final, deductibles are used by insurers 10 re dice bot moral and morale hazard Some dishonest insureds may deliberately cause a los inorder to prof fom insurance. Deductible reduce moral haz- acd because the insured may not prof if 2 los Dedoctibles ate also used to reduce morale har and. Morale baracd is carelessness o inifferece to alas becanse of insurance, which increases the chance of los. Deduciles encourage peopl robe ‘one careful with respect to che protection oftheie opty and prevention of loss because these ‘nustbra a part ofthe los. Deductible in Propet Insurance ‘The following deductibles are commonly found im propery insurance contracts Suraght deductible Aggregate deductible Suraigh Deductible With a straight deductible, he insured mst pay a certain mentber of dollars o oss bufore the insurer is required t0 make a payment Such a deducribe typically applies to each los. An example can be found in automobile calision asus noe, Fr instance, assume that Ashley has calsion insurance on her new Toyors, with a $500 deduct ible a collision loss is $7000, she would secive nly $6500 and wonld have to pay che remaining 510 ees Aggregate Deductible Commercial insurance con- fratts sometimes contain. an aggregate deductible, ‘An aggregate deductible means that ail losses that ‘cur daring «specified time period, usually a policy year, are accumulated to satisfy the deductible amount. Once the deductible i satisfied, the insurer pays all foe lasses in full. For example, assume ‘hat the policy contains an aggregate deductible of $10,000. Also assume that losses of SOQ and. $2000 occu, respectively, daring the policy year ‘The insurer pays nothing because the deductible is not met I tied Toss of $8000 oecurs ducing the ‘ame ime petid, the insurer would pay $1000. Any oer loses cccuing during the policy year would epi in fl, Deoucristes 199 Deductibles in Health Insurance Tn health insurance, the deduce can be sated in teem of dollarsor tine, Deductbles in health nsug- ance include ee following: 1 Calendaryeir deductible 1 Cocidor dete 1 Hliminaion (ating) period CCalendar.year Deductible calendar-yar deduct Bhs ype ofagarenate dedecibl thts fund in basic medical expense and major medial ireurance contacts, Elgjbe medical expenses are acurmlated during te clea yeas and once they exceed the deductible amount, the insrer rust then pay the tenets promised under the contract, Once the de- ductble iy satsed daring the calendar yar, x0 tional deductibles ate impose on the nsured Coridr Deuce. Hopes vith ase mee taper plans ofen Wish 0 supplement te baie Re Oa maar onal ae Acre dence 2 dalle tht canbe used to ite pte bsic medial expose pla wit 2 supple- Stal major medial expense plan. The coridor eto st be aiid Before the major medica on pays any beef aan rade decile appli ony ibe nec expenes ta are not covered by the basic dial expense plat. For example, assume chat Janet has $20,000 of covered medial expenses, of Sehck§ 16,00 spd bythe base medica expense lan che supplemental major media pan has 2 $i00 corridor deduce, Jane sus pay $300. The Supplemental plan wil covee the remaining $3700 of pees subjt 1 ay inition or coinsurance provisions that may apt. Elimination (Waiting) Period deductible can also be expressed as an elimination period. An elimina tion (waiting) pesid is a stated Period oftme atthe enon of Tos daring sbi ro svance bene fusare psd, An elitinaton period is appropriate for 1 sg oes that 066 et sme tie rio, such te the lost af wotk earings. Elimination peioc are Commonly used im diabiltyncome contacts. For trample, disabilty-come insurance contacts that replae part of 2 cisabed wotker'seanings (yicaly trve efiminvion petiods of 30 60, or 90 days, or cvealonger periodsCOINSURANCE CCinsuranes is a contractual provision that often appears in propecty insurance contracts, ‘This especially true of commercial property insurance contacts. Nature of Coinsurance [Acoinsurance clase in. property instrance contract ‘eowrages the imured to insure the property to @ stated percentage ofits mswable valu. If the co insirance requirement snot mat at the time of los, the insured must share a the loss asa coimsurer. Tae insurable value of the property’ isthe actual cash value, ceplacement cost, or some other value des- $100,000 = $75,000 Since the insured has only three-fourths of the = quired amount of insurance in force atthe time of loss, only thrce fourths of che loss, or $75,000, will be paid, Because the coinsurance requiemen: isnot ‘net, che insured must absorb the remaining amount ofthe los. CHAPTER 10 / ANALYSIS OF INSURANCE CONTRACTS ‘When applying the coinsurance formula, exo tuicional points shoal be kept in mind. First, the ‘mount paid can never exceed the amount of the sctual loss even though the ecinsuance formula pro duces such a esult: Tis case could happen if the amount of insuracecaridis greater than the min imum sequied amourt of insurance. Second, the ‘maximum amount paid for ay fos is imiced to the face amount of insurance. Purpose of Coinsurance ‘The fundamental purpose of coinswance is io achieve equity in eating. Most property insurance losses are pata rather than total losses. Bur if everyone insures ony forthe partial ls rather chan, for the total los, the premium rate fr each $100 of insurance would he higher This rate would. be inequitable to insureds wio wish ro insure their Propecty to full value. For example, i everyone insure to fall valu, assume tha the pure premium, rate for fire insurance i 25 cents for each $100 of insurance, ignoring expenses and che profit allo ance ofthe insurer (see Exhibit 10.1), However, if each properry owner insures only fora partial loss, the pure premium rate will iecrease from 25 cents per $100 of fie insurance to 40 cents per $100 (see Exhibit 10.2). This rate would te ineguitable co propery owners who want to insure their buildings fll vale. 1 fll coverage is ese, the insured would have to pay a higher rte of 40 cents, which we calculated eadiee tobe worth ‘only 25 cens. This rate would be inequitable. So, if the commence ragurement 45 rer, she smured Exar 10.1 Insurance to Fall Value esta 200 bugs tai 35200000 esch toate to Sl ale frat $00 illo of fee isso the flening re ves oe wallace = $ 09000 SOparallossesar0p00exch - $ co0aK0 Toxic oses pad byiesrer = $1,007,009 Pepe te . 2 cons per 100 finguaneeEss 10.2 Insurinceo Ha Value ‘ese tht 200 lings vale t $2000 each andre laren rol F200 mon of fretsurarce The fling felesies occu it ses (540.000) Ins ayy = szon000 Sparel lsse aS2nc00esch = s6o0o00 “fe sses pid by nsurr Pure reams cers pr S00 ofirsuance rede «mate dscu, tthe pligcuner who i tndoinae is poaled tong pplication ofthe ccoinserance formula. ‘Arana wo coisranct, dad sates canbeuinds by whith rate sous te pena the froma fics ols snc Hower, th se rues an asia appa of ech props deri the regu ant ofr thet wbch wold be extreely expense forthe iaute In adiion te apprual metbod i usa factory if property values fluctuate widely during the olf or hoe exons the cng fo toler anata of aed ety ed 0 aise equity inne, ‘coinsurance Problems Som: praca problems ase when a coinsurance clase i present in contrat. Fst, afaton can ‘eatin a serous coiautance peal the amount ok insurance isnot peredically nese for ita tin. The sured may bein compliance wit the coinnrance clause when the piy fist goes into elles howeves, pice inltion could increase the tclaener cove of the propery, The resi hat the insted sy ot be eatrying he eouired amount of marance 2 the ine of os an he ose wil then be penalized if os oceat. Ths, coins ance dae is presen, the amcust of insurance car Sed shold e pris evalsted to deeming whee the coinsurance requirements beng ne Second, the insored may incur a coinsrace penalyif property vals fuctoate widely during the OTHERINSURANCE PROVISIONS 201 policy period. For example, there may bea substan sil increas in inventory values because ofan unex pected arival of a shipmem of goods. Ha loss ‘occurs, the iosured may not be carying sufficient [surance to avoid a coinsurance penalty. One solu- tiom this problem is an agreed salve coverage, by which the insurer agres ia advance dat the amount of insurance caried meets the coinsurance require- rent, Another solution is 2 reporting form, by which property values are periogtallyrepored to the insurer COINSURANCE IN HEALTH INSURANCE Health instance contac feguentiy costin a coinsurance ian which schol led a pore centage pripaton laws I pata major rei pliies typi area cise provi ‘oe the cies the sel eo pay estan per George of covered mda expeni neces ofthe fede, Atypcsl ian eis the sed Fay 20025 percent ofcovered expenses in exes of the deductible, Foe example, assme dar Mogan has Covered medial expenses in the aos of $5,500, tnd ht she has major eal oy wich a $500 decile and an 80-20 coinurare case. The inser pays 8 perent of he il nee of the ecb or 40,0, nd Megan pays 20 percent, 0 0,00 le $500 doc “he parte comune nhc iurence 210 (i) 0 eb prntane on (20 prev er tration of pley benefit. cae the aed as prt of eco pees are ee Ina Son the ptt il gt demand the met expense medal serves ito he pays ef the cos OTHER-INSURANCE PROVISIONS Otherinsuranee provisions typically ace present in property and casualty insorance and beth insur ance contracts. These provisions apply when more than one contract coves the same loss. The purpose of thse prewsions 0 prevent going from incur ance and sivlation of the principle of demi. Ik the insured could collect he full arpount ofthe loss202 CHAPTER 10 / ANALYSIS OF INSURANCE CONTRACTS from each insures, there would be profiting from in surance and a substantial increase in moral hard Some dishonest insureds would deliberately cause 3 Joss to collect mulile tenes. Some important etherinsurance provisions in property and lisblty insurance include (1) the pro ata labiy clause, (2) conteibuton by equal shares, and (3) primary and excess insurance Pro ata Liability ro ata fail is 2 generic vexa for a. provision ha apis when rw or moe polis of the sume type cover he same insurable ners she peop- ery. Each inser’ share ofthe oss based onthe froporton that its insmance bear to the toll mount of surance onthe propery. For example, assume that Joab ovens 2 bung and wishes to insure it for $500,000. For undernting reasons inser may int he amount of sun hey wl verte ona given propery. Asume that an agent places $300,100 of insurance with Company A, $100,000 with Company 8, and $100,000 with Company fora ttl of $50,000. $100,000 los xcs, tach company wil pay only spo rata shave ofthe loss (ee Fxbbit 103). Thus, Jacob would col 100,00 fx the los, oe $30,000, ‘The basic purpose of th pro raa lly clase i to presere the prmciple of indemnity and to reve pring from insurance athe preceding example te pro raalibilty danse wee not pres ent the insured would collet $100,000 fom each inser ora tal of $300,00 fo a $100,000 ts Contibuton by Equa Shares Contribution by equal shares isanother ype of ther Insurance provision that often appears in lability insueance contracts, Each insurce shares equally ia Emr 104 CConibuton by Equal Shares (Example 1) Amount afos ~ $150000| rout of rence Company A ica Company suo 000 Company 200000 cast 103 Pro Rata Laity Example ‘00900 00000 toa sono $1000 5 29 sono = § 20000 SOD 5 20 si00000= § 20 ‘companys 60 1000 = § 60000 company 8 or 20% 5100000 § 20,000 Company ¢ Tezllesspament = Stoo) the loss unt th share pid byeachinsucer equals the lowest init of lably under any policy or ut the {oll amount ofthe losis paid. For example, assume thatthe amount ofinsersnie provided by Companies A,B, and Cis $100,000, $200,000, and $300,000, _epecivel. the loess $150,000 each insurer pays anequal share, or 0,000 [sce Exhibit 10.4). However, ifthe lass were $500,000, how much would each insurer pay? In this case each insu ‘would pay equal amounts units policy limits are cethaused. The remaining insurers thn continue 10 share equally i the remaining amount ofthe loss ‘nil each insurer has aid its policy mi in fall, ot un he fll arnount of he loss is paid. Thus, Com pany A would pay $100,000, Company B would pay ‘$200,000, and Company C would pay $200,000 (sce Exhibit 105) I the loss were $600,000, Com- pany C would pay the remaining 100,00. Primary and Excess Insurance Primary and excess insurance is another type of ctherinsurance prison. The primary insurer pays fit and he exces insorer pay ony after the policy limits under the primary policy are exhausted. Courtine Stes Ta Pid 50000 50,000 sso000 50900 50000 soooExtuair 10S Contbution by Equal Shares [Example 2) Amsartof as = $800.00 Amount nance Company® ‘stoaot0| ompary8 szoao00 Company sso0000 ‘Awo insurance is an exellent example of pri ‘mary and excess inguranc. For example, assume that Bob occasionally dives ills car. Bobs policy ‘ha liabilry insorance limit of $100,000 pe peson for bel injury liability. jl policy has a limit of $50,000 yc person fr oly injury abil. IF Bob negligently injures another motorist while diving Jills cus, boch policies wil eover the loss. The nor ‘mal ale is tht lailiry insurance on the borrowed aris primary and any other insurance considered ‘exces. Thos, if coum orders Bob to pay damages ‘of $75,000, J's policy is primary and pays the st $50,000. Bobs poy is excess and pays the emai ing $25,000, ‘The coordination-f-beneits provision in group health insurance is ancther ceample of primary and ‘excess coverage, This provision is designed ro pee vent oreinsurance and the duplication of beneis if ‘one gerson is covered undee more than one B/Oup health insurance pan The majority of states have adopted pan orl of the coorination-o-henefts provisions developed by the National Association of Insurance Comasion Mie took hisfrien, Dona, crm diane om he bit dy. Wil ding Doooa home, Mike became il and asked Donna drive, Whe driving Mike xt Dona alge ijcedencber nator when ste led ro stop a elit. Mike hasan aut anes policy ita ably insurance Lic of $250,000 pe person foci ability. Donna has sila auto insu- ance plc with aint of $100,000 pr person. 4.if coor award lal judgen of $100,000 aint Donna, bow mech, any, wll ech insoree pu? OTHER-INSURANCE PROVISIONS 208 Cons by ul Ses ea Pid son000| sioo,c0 Sono + stongoo 0000 109000 + sioggoa san0,c0 crs (NAIC) The rls aze complex, and only two of them are discussed hee. Fst, coverage as a om ployer isusually primary to caverageasa dependent For example, assume chat Jack an Kelly MeVAy are both employed, and that each insured asa depend: tt under the osher’ group bealth insurance plan. I Jack incurs covered medial expenses, is plicy pays frst as primary coverage. He chen submis his unte imbucsed expenses such s the deductible and coin surance payments to Kellys insure Kellys coverage then applies as excess insurance, No more than 100 percent of the eligible medical expenses are paid ‘under bah pans ‘Second, the bthday cule applies 1 dependents in Farulioe Where the parents are marie or are not separated. Uncer this male, the plan of the parent swhose birthday occurs frst during the year is bri ‘mary. For example, assume tat Kelly's birthday isin Janay, and Jak’ birthday is in Jy if heir aug terishowpitalize, Kell’ plan spear. Jak’ pan would be excess. The purpose ofthe birthday rue is to eliminate geader discrimination with respect to coverage of dependents 1s eb jaye i $300,00, how mock, if anywlleac insurer pay? «Anu tae Mike canner afford wo pay the pre= ‘in and kes is auto insurance poly lap. Ac the ti ofthe asdeny hi univued- the bi tiiy jadgmenr aguas: Dona i $100,000, how auch fay wll Donn’snsere ay?204 CHAPTER 10 / ANALYSIS OF INSURANCE CONTRACTS SUMMARY 1 Ivucace contacts ganrally ean be dived ito the Jolin pts: Declztons Defions nsug gene clusions onions Misclanons provisions 1 Declarations te statements concerning the ropecy er cig oe ose 1 The finns page or section dens the key words or pass so hat coverage unde he pbc an be deter ined more. 1 The inuringspreement summarizes the promises of the inure. Thee ate re Basic tyes of isang agement Nome psi coverage “Alliske coverge Al poles contain one or moe excisions. Tere te "ee major peso elsons: xclded pce Excladed esses Exclude propery aclsions ave necesary foe several reasons. Carin peri ace considered uninsrable y pete neces ‘earoeinary hazards may be ese covecae ip vided by oor contre orl sae ie preset 93 ‘igh dager and coverage is por needed by the ype ined 1 Conon are provision ha ually or place Limits. ‘as onthe ise’ promise © perform. Condiions impos cen duties om theese ec he wishes roeolect focal. % Miselineoss provins in propey and exsuty insurance incade cznellaon, subrogaon, rqure- res loss occur, agent of the pols, and ther imamace porns ~The conta ase contin definition of “sued The cotract may caver only one person, or it may cover echer persons well ee though they © not spel ame inthe poi. 1 An enonement, of fds i 2 writen provision that dds, eles eo, oF odes te eon inthe ‘ginal contact Aa eedarsmen of eder aoenaly has precedence oer any conic ems i the con tent to which the endorser isaac 1A deus requires the ised to psy part ofthe as. 2 spe ame i subwted fom the ot loss pgmen that thre woald be payable, Denies axe sed tenia sil dais, rede prema, nd te race moa and neale hazard. Exazples of deductibles ince a steigh daduele, aggregate de luce clndar yen devel, condor deduce and elimination (waig! period 1A coinsrance clase in pope asrace requis de lasuedo insure th ropry fr 2 sted peeenage oF is insrable le the ie fle the nnsurance ritemest is nota the ene of le the inared sn shares the ls 9 coinsucer The Fundam purpose of coinsueane so achieve equi ia ati. A coinsurance chuse (perenage parikgaion clase) is ypclly fund in major melicl polis. A gpl rovisen requires the ince o pay 80 perce of fred expen in excess of the deduce sad he insu 0p 20 psc | Otherinsurance provisions ate peer in many ins ance contacts, These provisions aply when mor chan fone poiy coer the san lst. The purpse ofthese roviscas 40 prevent prong fom instance and vickcion of he principle of inde. Soe important ‘ethriasuzance provisions ale the ro rata abit clause, comtiburion by ogulshars, and peimary and KEY CONCEPTS AND TERMS Anaenate orion deduce Aedocle “All ts" polcy Declarations Calendar Deducsible deduce Flimiation (iting) Coinsrance clase peed Candions Endorsmts CConuituionbyeqesl an nes shares gui ning Cooriaaion ottendis — Excasions rovison Insuring agementargos pile Named insured [Nara rls pobiy (Oper poli Other innrance provisos Pecetagepacistion les (iesarance) Primary andesces eo rata lnbiley Spec ovecage policy Sight dedvtbe REVIEW QUESTIONS 1, ny the basic parts ofa insurance contrat, 2. 4, Describe te msjor rps of exason ypc Sond in saranee conta 1 Why are exlusions used by estes? 24 a Dace the tr “conditions.” 1 Dees ensure haw o pay an aber oreed los if the isa fails comely with che poly condos? Expaa your answex, 4 2. Whac isthe meaning of “named insures? 1. Can her partis be ised under a policy enn ‘hough dey ate ot specifically named? Exlain soar ase 5. a, Wharsan endorsement oe ier? 1 an endoramene conics with 2 poy prow sie, how ste problem escved? 6. a, Deseibe the following yes of deduces: (i) suaight deuce (i calendaryac deduce (Ga) sage dedeile '. Bap the purpoms of deduces 2 propery 7. a, Buphin how 2 coisurnce clase in property snvrance wer Whats te fundamental purpose of coinsurance clause? 8, Desc pica simran au eee ae tigation couse ina major medial poli 9, a Whats the purpose of her nserance rossions? 1, Givesncxaple he portable 10, Esplin he mesing of pinay insurace and excess APPLICATION QUESTIONS 205 APPLICATION QUESTIONS 1. Miche owas sal plane hae ison weekends is agenc infos him tha ance are eat as Prssoal property ude the homkownes pole. As fn inode fl tht hepa sheld be covered juste a kr peso propery he ors 4. Explain w Michael cerationale Sor extn en tain spe of ponent such 36 acai under the bmeawaes poli Explain some adstonal sense why excasions are presen nimsurance conti, 2. A oanuactuing fem incre! the fllowing in sured sss, ia the order pte, ding the urn poly yes Laet_Amoua of Lees ~ § 2500 ec) ano ow much would the company’ insurer pa for cach ssf ee policy contained he alloningtrp2 of deduce? 1) S000 sight deduce (2) $15,000 anmlaprepate deduce | Faplia the condition oFbenets provision that is epi found in group maa expense plas. 4. Stphasie guns sel wathoote that inte for $200,000 under a commercial propery inscarce po ic The poly canis 20 80 percent coinsurance clause. The warehouse sustained 2 $50,00 loss be- cause of fic ia a storage sre. The eae cot ofthe waehousea theme of oss $5000, 1 What ithe inser ability i any, for dhs les? Show yur cleans Assume thar tphanie cared $500,000 of pron- fey Instance op the warehouse a he ne of ‘os the arnt of oss $10.00, how mach vel she collect? Explain he theney or rational of coinsurance na propery insuranc eontrt. 4, Andrew owns a commensal oce aiding hat Issued under thee propery issuance contrat He has $100,000 of insurance from Company A, $201000 from Comsoy B, and $200,000 fom Company C206 CHAPTER 10 | ANALYSIS OF INSURANCE CONTRACTS 2. Asune ht the pro 1 lab proven ap- eas in exch pat a $1000 los ox, how much wil Ande cole mech ure? plain oar anv b. What ithe purpose ofthe eberisance po Tons that are freuen found in insnce 5 Asume ht» $300.00 Katy cin is cord ne inl insane contac Foes Bhat $50 i of ablity ote ci, we Pay Basa $125.0 linea abiy thconses pro- video otiton by sl haces, 2 How such wll ech inser conte oward shih Esplin yor mawen bs tke cam wae oly $50,000, ow meh wold cach icerpy? 5 Ashley ass msjor mea ea insrace poly “rtha SU mo ein init The cys 48800 Galena yea decal sd a $020 conan awe (prcertage prion ca), ey bad tata spy ena ano oer fo and incredimail tis $10, How macho A leit uy? How ouch Acleyhave pay? 7 The Linn Saldog profesional inr league busta tam in the Aneian Aston lagu “The clos sine fo $2000 anders eam eral pope nuance poly withan 80 pce coinuatce ls. The cent eaceent et of the cbse i $500,00, Afra aa ane for the gue champion, a wil wb forged oes shed ota ae eed Te dake ese $4.00 es. rig ny ect, how much wi the em inser er oa? INTERNET RESOURCES 18 The New Yer State Insurance Deparment publishes 2 under of consuner publications en basic isuance ‘ona tat can be adel online. The publications ‘are Helpful io understanding the rsous contactal Drovitons and coverages that appear in homeowners and so srance an ser nsorases cote Vit thesie st apenas 1 The Offce of he Commissioner of isurare, Sate of “Wiscansin alo kes avaible consumer publications psi insurance contac. These publitins are hela derstanding the contsciulpovsios 2nd coxerags that apyat in fe, health ast, and home ‘ownerinsurine, Vist the site a bode 15 The insurance information Intute publishes eorsumer ‘aerial deslog with zeopery ad iy ssrance. ‘The palonons can help you understand he cote tual provisions and coverages tat ppearin homeo rs ao, person bly and od insurance, ed cher propeny ard casual insurance coverages. Vit theste at hitter 1 The Tas Deparment ofisurance provides conse he amount af conse infermaton on at, ome ‘ove life and bea, and ote pes of insane, Information on how to lk a complaice agit an ‘nace alo provided, Vii the sie at pfawndatenajindetent SELECTED REFERENCES Anderson, Bist M. Andiron Life Ince. Beto: Lit, Bron, 191, Sel Aeron Lite ine snce—1995 Supplement Crawford Maciel Lf and Health iawance Lay Sth Boson: McGraw Hilewin, 1938, (Graves Bdwand Ean Bucke A Christensen, ed. MCs gel Aspects of Life asian, he. Bryn Ma, ae Te Amicon Cole Press, 2008 Keaton, Rober and Alan. Widis. rane Lov: A Guide t0 Fundamental Principles, Legal Doawizes, and Commercial Praia, student eon. St. Pl MN: bling, 188, Loris, Jes J ta. The Legal Emionmont of a ancy, od, vol. Vand 2 Malvern, PA: Ameccan Lasitue for Popery and Libliy Underwriters, 1593, McGann, Diane M. Life and Heals trwrance Law. Wshingon, DC: ineematonal Chie Asiociaton, 2005Wering, Eric A. Foundations of Risk Management and stance. Maver PA: Ameccan Sey for CPCU Trsuane sie of America, 2002 chs. 1-19 ic A. and Donald. Malek, Psrance Co trad Aralys, Malvern, P&s Ametcan Insite for (Chanel Propery Cassy Underwriters, 192. NOTES 1. C. Ankur Willan, Je, George L- Head, Ronald C Hom, and G, Wiliam Gladensing, Principles of Risk Mangement and Tenant, 2 Oalvem, tly Unde 2. id pr o. A; American Instn for Property Cass ies, 1981) 9p. 52-56 200-201 eee eer cree Peery