Chapter 9 Basic Property and Liability Insurance

Basic Property and Liability
Insurance Contracts
First purpose of this chapter is to make reading
insurance policies more meaningful
 To demonstrate technical English in action
 To integrate many readers covered in a business
law course with the study of insurance
 To help students think logically and constructively
about problem solving.
Figure 9-1 Building Blocks of Insurance Policy
Insured has to read the policy at the time of
issuing not just be concerned about collecting
payment from insurer.
Is the property covered?
Is the person covered?
Is the loss caused by a covered peril?
Do any deductibles or exclusions apply to the
Do policy conditions limit the amount of
coverage ?
Is the location of the loss covered?
Did the loss occur during a covered time period?
Figure 9-2 Can I collect on my claim ?
 Declaration
page (D)
 Insuring Agreement(I)
 Condition(C)
 Exclusion(E)
Declarations (D)
First element of property and liability insurance
Presents the important facts about the coverage
provided and personalize the coverage to a
particular insured.
Example: Specification of property
covered(which house, which car, which person).
Declarations also specify the insurer’s limits of
liability , the annual premium, and payments
due for shorter ( quarterly, semiannual) periods.
Declarations are prepared from information that
the insured provided in the insurance
The insuring agreement is the heart of an insurance
It summarize the major promises of the insurer.
The insurer agrees to do certain things, such as paying
losses from covered perils, providing certain services
(such as loss-prevention services) or agreeing to defend the
insured in a liability lawsuit.
If the loss is not excluded, then it is covered.
In the homeowner policy , personal property is covered for fire,
lightening, windstorm, and certain other named perils.
Only losses caused by these perils are covered. Flood damage
is not covered because flood is not a listed peril.
Most of life insurance contracts cover all causes of death whether
by accident or by disease.
The major exclusions are suicide during the first two years of the
contract; certain aviation hazard exclusions, such as military
flying, crop dusting, or sports piloting; and in some contracts,
death caused by war.
Deductibles: In property insurance insurers call the
first dollars of loss amount that the insured has to pay.
 Straight deductible : If the insurer pays only for the
amount of loss in excess of the deductible.
Example: If amount of loss is $100,000 and $200
straight deductible, the insured would pay $200 and
the insurer would pay the remaining $99,800.
 Percentage deductible: The insured pays the first
percentage of loss whereby the insurer paying the
amount in excess of the deductibles.
Example: 2 percent deductible on a $200,000 home
destroyed by hurricane wind would require the insured
to pay $4,000 and the insurer to pay $196,000.
Combination of straight deductible and percentage
deductible is also applied by insurance companies.
1- Deductibles reduce the morale hazard because the
insured must pay a small part of every loss.
2-Deductibles eliminate the expenses involved in
settling small claims. Savings from reduced expenses
and payments for small losses are reflected in lower
3- Deductibles cause the policyholder to finance some
of the loss. Policyholder has a significant financial
contribution to overall loss costs.
Some insurers encourage insured to choose larger
deductibles and use the savings to lower premium or
increase policy limits.
Exclusions identify losses not covered.
 If an insurer denies to pay the claim because the loss is
excluded in the policy it is the legal responsibility of
insurer to prove that it applied the exclusion correctly
otherwise the insured can contest the denial.
 Property Insurance exclusions serve the following purposes
- To eliminate losses arising from catastrophic events(e.g.
insurers exclude damage from nuclear radiation).
- To eliminate losses associated with the moral or morale
hazard(e.g. in HO policy excludes theft committed by an
- To eliminate coverage not needed by the typical insured.
In these cases, insurers allow those insured to pay an extra
charge to remove the exclusion (e.g. the HO policy excludes
liability losses arising from business pursuits, but by using
the endorsement the policy cover specified business
lawsuit( such as baby-sitting).
There are three major types of exclusions:
Excluded perils, excluded losses, and excluded
The contract may exclude certain perils, or causes of
loss (excluded perils).In a homeowners policy, the
perils of flood, earth movement, and nuclear radiation
or radioactive contamination are specifically excluded.
Certain type of losses may be excluded(excluded
losses). In the physical damage section of the personal
auto policy , loss to a covered auto is specifically
excluded if the car is used as a public taxi.
The contract may exclude or place limitations on the
coverage of certain property(excluded property).
For example, in a homeowners policy , certain types
of personal property are excluded , such as cars,
planes, animals, birds, and fish.
Endorsements modify standard insurance contracts
and they add coverage directly or add coverage by
deleting the exclusion in the standard policy .
Endorsement can eliminate coverage(for a reduction
in premium) or exclude an insured (for example, a
teenage driver).
In order to achieve the variety of coverage goals
endorsement can be used.
Conditions provide a framework for the insurance
policy , explaining many of the important relationships,
rights, and duties of the insurer and insured.
Conditions are provisions in the policy that qualify or
place limitations on the insurer’s promise to perform.
In effect, the conditions section imposes certain duties
on the insured.
The 165 lines of the1943 New York Standard Fire
Insurance Policy (SFP) contain most of the conditions
in fire insurance policy and as mandatory foundation of
all property insurance forms.
Figure 9-3 shows the traditional 165 lines.
The first six lines of the 165 lines explain the results of
fraud committed by an insured.
Notifying the insurer if a loss occurs
 Protecting the property after a loss
 Preparing an inventory of damaged personal
 Cooperating with the insurer in the event of a
liability suit
Example of insurance fraud
Liam insured his house with the ABC Insurance
Company. The policy was for $5,000 coverage on the
house and $3,000 on the contents.
Moral hazard: After the fire destroyed the house,
Liam filed a sworn proof of loss that included a claim
for a number of nonexistent items. Later, Liam
dropped the claim for the contents, but the claim for
the dwelling continued.
The court denied Liam any recovery because the
provisions of the insurance policy as to concealment
and fraud are applicable and a sworn proof of loss
which includes nonexistent items voids the entire
Under the provisions of the current
homeowners(HO) the insurer denies the claim if
before or after a loss, an “insured” has:
1-Intentionally concealed or misrepresented any
material fact or circumstances.
2-Engaged in fraudulent conduct; or
3-Made false statement; relating to this insurance.
Some insurance policies specify conditions where
the coverage is suspended.
 The word “while” precedes these conditions,
implying that while the specified condition is
present, coverage is suspended, but if the
condition ends, coverage is reinstated.
 Condition suspending coverage in the 165 lines
- Increase in hazard within the knowledge of the
- Vacant or unoccupied for more than sixty
consecutive days.
Saggy company purchased a fire insurance policy on
its warehouse. In fact, the building was not being
used as a warehouse but as a mattress factory
(keeping the flammable material such as cotton and
cotton dust).
When the “warehouse” burned, the insurer denied the
claim because the hazard was increased within the
control or knowledge of the insured.
If a case is litigated, the court must decide whether
the hazard was increased “substantially”. In this case,
the court ruled in favor of the insurer, finding the
increase of hazard was “substantial” when the
warehouse was used for making mattresses.

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