chapter 10 modified to 11th edition
TRANSCRIPT
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Chapter 10
Analysis of
Insurance
Contracts
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Agenda
• Basic parts of an insurance contract
• Definition of the “Insured”
• Endorsements and Riders• Deductibles
• Coinsurance
• Other-insurance provisions
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Basic Parts of an InsuranceContract
• Declarations are statements that provideinformation about the particular property or activityto be insured
–
Usually the first page of the policy – In property insurance, it contains name of the insured,
location of property, period of protection, amount ofinsurance, premium and deductible information
• Insurance contracts typically contain a page orsection of definitions – For example, the insured is referred to as “you”
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Basic Parts of an InsuranceContract
• The insuring agreement summarizes the majorpromises of the insurer
– The two basic forms of an insuring agreement inproperty insurance are:
• Named perils policy, where only those perils specifically namedin the policy are covered
• “All-risks” policy, where all losses are covered except thoselosses specifically excluded
– May also be called an open-perils policy or special coverage policy
– Insurers have generally deleted the word “all” from policies
• “All-risks” coverage has fewer gaps, and the burden of proof isplaced on the insurer to deny a claim
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Basic Parts of an InsuranceContract
• Insurance contracts contain three majortypes of exclusions
–
Excluded perils, e.g., flood, intentional act – Excluded losses, e.g., a professional liability
loss is excluded in the homeowners policy
– Excluded property, e.g., pets are not covered as
personal property in the homeowners policy
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Basic Parts of an InsuranceContract
• Exclusions are necessary because:
– Some perils are not commercially insurable
• e.g., catastrophic losses due to war
–
Extraordinary hazards are present• e.g., using the automobile for a taxi
– Coverage is provided by other contracts
• e.g., use of auto excluded on homeowners policy
– Moral hazard is present or it would be difficult to measure theamount of loss
• e.g., coverage of money limited to $200 in homeowners policy
– Coverage not needed by typical insureds
• e.g., homeowners policy does not cover aircraft
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Definition of the “Insured”
• An insurance contract must indicate the persons orpersons from whom the protection is provided
– Some policies insure only one person, e.g., most life
insurance policies – The named insured is the person or persons named in
the declarations section of the policy
– A policy may cover other parties even though they are
not specifically named• e.g., the homeowners policy covers resident relatives under age
24 who are full-time students away from home
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Endorsements and Riders
• In property and liability insurance, an endorsementis a written provision that adds to, deletes from, ormodifies the provisions in the original contract – e.g., an earthquake endorsement to a homeowners
policy
• In life and health insurance, a rider is a provisionthat amends or changes the original policy – e.g., a waiver-of-premium rider on a life insurance policy
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Deductibles in Property Insurance
• With a straight deductible, the insured must pay acertain amount before the insurer makes a losspayment
– e.g., an auto insurance deductible
• An aggregate deductible means that all losses thatoccur during a specified time period are
accumulated to satisfy the deductible amount
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Deductibles in Property Insurance
$200
Straight Deductible
$200
Aggregate Deductible
Date Claim You pay Ins co pays You pay Ins co pays
1/31 $100 $100 $0 $100 $0
3/31 $500 $200 $300 $100 $400
5/31 $2000 $200 $1800 $0 $2000
7/31 $5000 $200 $4800 $0 $5000
9/30 $100 $100 $0 $0 $100
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Deductibles in Health Insurance
• A calendar-year deductible is a type of aggregatedeductible that is found in basic medical expenseand major medical insurance contracts
•
A corridor deductible is a deductible that can beused to integrate a basic medical expense planwith a supplemental major medical expense plan
• An elimination (waiting) period is a stated period oftime at the beginning of a loss during which noinsurance benefits are paid
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Deductibles in Health Insurance
• Example of $250 Calendar Year Deductible
Date Claim You pay Ins co pays
2/15 $80 $80 $0
4/17 $160 $160 $0
5/27 $500 $10 $490
8/2 $250 $0 $250
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Deductibles in Health Insurance
• Example of $250 Calendar Year Deductible and$200 Corridor Deductible
Date Claim Covered By Which Plan You Pay Ins Co Pays
1/30 $80 Basic $80 $0
4/17 $130 Supplemental $130 $0
5/17 $1000 Supplemental $70 $930
5/27 $400 Basic $170 $2306/14 $30 Basic $0 $30
7/15 $100 Basic $0 $100
8/2 $3000 Supplemental $0 $3000
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Coinsurance in Property Insurance
• A coinsurance clause in a property insurance contractencourages the insured to insure the property to a statedpercentage of its insurable value
–
If the coinsurance requirement is met at the time of the loss, theinsurance company pays the total amount of the loss, up to theamount of insurance carried
– If the coinsurance requirement is not met at the time of the loss, theinsured must share in the loss as a coinsurer by only recovering:
recoveryof Amount Loss xrequired insuranceof Amount
carried insuranceof Amount
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Coinsurance in Property Insurance
• The purpose of coinsurance is to achieveequity in rating
– A property owner wishing to insure for a totalloss would pay an inequitable premium if otherproperty owners only insure for partial losses
– If the coinsurance requirement is met, theinsured receives a rate discount, and thepolicyowner who is underinsured is penalizedthrough application of the coinsurance formula
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Coinsurance in Property Insurance
• Examples using 80% Coinsurance,$1,000,000 hotel – If insured for $1,000,000 and have a loss of $600,000; recovery =
$600,000 – If insured for $700,000 and have a loss of $600,000 then
recovery = (700,000/800,000) x 600,000 = $525,000
– If insured for $800,000 and have a loss of $600,000; recovery =$600,000 because you carried at least the minimum 80% required
for full recovery – If insured for $900,000 and have a total loss of $1,000,000 then
recovery = $900,000 because that is how much insurance youcarried
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Exhibit 10.1 Insurance toFull Value
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Exhibit 10.2 Insurance to HalfValue
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Coinsurance in Health Insurance
• Health insurance policies frequently containa percentage participation clause
–
The clause requires the insured to pay a certainpercentage of covered medical expenses inexcess of the deductible
– The purpose is to reduce premiums and prevent
overutilization of policy benefits
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Coinsurance in Health Insurance
• Example of 80/20 Coinsurance, $250 Deductible,$1000 Stop Loss
Date Claim You Pay Insurance Company Pays2/14 $80 $80 $0
5/28 $160 $160 $0
7/4 $500 $10 + $98 = $108 $490 x 0.80 = $392
10/31 $260 $260 x 0.20 = $52 $260 x 0.80 = $208
11/27 $4000 $600 $3400
12/25 $500 $0 $500
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Other-insurance Provisions
• The purpose of other-insurance provisions is toprevent profiting from insurance and violation of theprinciple of indemnity
– Under a pro rata liability provision, each insurer’s share of
the loss is based on the proportion that its insurancebears to the total amount of insurance on the property
– Under contribution by equal shares, each insurer shares
equally in the loss until the share paid by each insurerequals the lowest limit of liability under any policy, or untilthe full amount of the loss is paid
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Exhibit 10.3 Pro Rata LiabilityExample
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Exhibit 10.4 Contributionby Equal Shares (Example 1)
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Exhibit 10.5 Contributionby Equal Shares (Example 2)
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Other-insurance Provisions
– Under a primary and excess insuranceprovision, the primary insurer pays first, and theexcess insurer pays only after the policy limitsunder the primary policy are exhausted
– The coordination of benefits provision in grouphealth insurance is designed to preventoverinsurance and the duplication of benefits if
one person is covered under more than onegroup health insurance plan
• e.g., two employed spouses are insured asdependents under each other’s group healthinsurance plan