# The insurance policy An insurance policy is a [contract](people-contracts.md) between an insurer and insured: 1. The insured is responsible for multiple actions: - Fully report the values of properties and risks (honesty clause) - Pay a premium determined by an [actuarial](math-stat.md) formula - Promptly report losses and cooperate throughout the claim adjustment process - Provide timely reports of relevant changes 2. In the event of a covered peril or liability, the insurer has multiple "aleatory" duties: - Adjusting losses according to the policy's guidance for a loss valuation - Duty to "indemnify" covered losses to the insured up to a predefined limit, either by restoring its value before the loss or paying the difference between before and after the loss (pair and set clause) - Duty to defend the insured on a covered liability claim, which includes investigating and defending any claim or lawsuit brought against an insured, with any doubt about their duty to defend working in favor of the insured - Coverage is *highly* dependent on the language of the policy - If the insured expands coverage without an additional premium, their expanded coverage will apply to *all* insureds immediately (liberalization clause) The historical basis for many modern insurance policies in the USA was based on the 1943 New York Standard Fire Insurance Policy. - Most property policies are in some capacity inspired by it, even though the policy itself has been expanded in every direction and the original policy was phased out of everyday use. - In practice, it mirrors the Basic Form Dwelling Policy. A policy has a few classifications of insured: 1. The first named insured has the highest rank and the broadest rights/obligations under the contract. - They can initiate policy changes, receive claims payments, and cancel the policy. - The insured is prohibited from transferring or assigning a policy to someone else without the written consent of the insurer. 2. The second named insured, if any, has the same rights as the first named insured. - They have the same rights as the named insured, including canceling the policy. - However, while the first named insured is *always* on that policy, the second named insured can be removed or changed. 3. Additional insured are extra people who are also covered. - They're on the policy document, but are often *not* on the insurance card. 4. Excluded people are on the policy to indicate they're *not* covered. 5. If there's a bailee (someone holding, storing, or moving that property), they are *not* covered unless they're insuring their liability. The terms are abstractly and explicitly clarified in a policy document, which is precisely the same for *every* written policy in that classification of insurance. - The Definitions clarify *exactly* what specific terms mean in the [contract](people-contracts.md) (e.g., Named Insured, Vehicle, Address, etc.). - The Conditions that indicate rules, duties, provisions, and obligations of both the insured and insurer. - Insurance policies are typically standard contracts with a vast collection of pre-defined conditions. - Conditions often address problem areas that may arise later (e.g., value disputes regarding appraisal, multiple insurance policies at the time of loss). - Exclusions eliminate coverage for specific occurrences deemed uninsurable or not calculated in the policy's premium: - It typically includes things that nobody can control (e.g., intentional acts, war, flood, nuclear radiation, smog, inherent vice, latent defect, rust/corrosion). - Exclusions also often exclude things the insured *can* control (e.g., wear and tear, marring, deterioration). - Property which can be better-insured under another policy is also excluded (e.g., autos in a homeowners' policy). - Endorsements change a policy's original terms, coverages, conditions, or exclusions. - They may be included when the policy is issued, later in the term, or during a renewal. - Mostly, endorsements add/change names and correct names/addresses. Since an insurance policy is a frequently used [contract](people-contracts.md), it has many standard terms/provisions. - Policy period - a window of time when coverage is provided. - Policy periods are most often 1 year, but can be 6 months or closer to a decade. - It tends to begin and expire at 12:01 am on the indicated date and address. - Sometimes, a policy will cover the time it takes to complete a task (e.g., a construction project, [transit](logistics.md) policies). - Policy territory - the location where coverage is provided (which may include property with a person while traveling). - Insured status - clarifies who is insured under a policy. - The insured status can range wildly in breadth, from a named insured all the way to entire people groups. - Standard mortgage clause - for real property, the legitimate interest with mortgage holders and how they most be notified of cancellation. - Loss payable clause - for personal property, the legitimate interest that finance companies have in it (e.g., autos) and how the loss payees will be named on the loss settlement check. - Other insurance - appoints coverages if more than one policy is written on the same risk at the time of loss. - It may be a product of design or of oversight, and can be nonconcurrent (written on a different coverage basis) or concurrent. - There are 4 ways to resolve multiple insurance in property and casualty policies: 1. The specific insurance for the coverage pays first (primary coverage). 2. Excess coverage pays *after* primary coverage (e.g., umbrella policy). 3. Loss payments among concurrent policies will be distributed proportionally, or "pro rata" (e.g., if Policy A has $50K coverage and Policy B has $25K coverage, Policy A will pay 2/3 of the loss). 4. Contribution by equal shares is paid the same as "pro rata", but the loss is paid equally by each insurer until it's exhausted, then the remaining policy covers the rest. That policy document receives a certificate of authority or license by a government's Insurance Division, and any updates must *also* be approved by that government as well to keep that policy authorized. - Nonadmitted or unauthorized companies may not be able to do business in that state. Once that document is approved, every policy is combined into a policy jacket with a computer-generated declarations page (or information page in worker's comp policies) as an insuring agreement, which declares how the defined terms in the policy connect to the insured: - The Named Insured and Additional Insured - Identification of the Property and Address - The Policy Term, Deductible, Premium, Coverages, and Limits - Any applicable forms - Any Exclusions Often, many insurance policies have *multiple* insuring agreements together in the jacket (e.g., property and liability). To clarify the information further, the insurer also provides policy guidelines for the underwriters, which give directives on what's covered and under what conditions. Before the policy can be formally written, but after the "binding" of the payment, the insurance agent issues a "binder" that gives temporary evidence of insurance until a policy can be issued. - Binders are valid according to the earlier of the effective date and issue date, and typically issued for 30-day periods. The policy effective date can usually start on any day from the present and goes for 12 months. - The term can range all the way from 1 to 12 months, but is typically 6 months for auto, 12 months for homeowners/renters and recreational lines, and longer for most other insurance. Any time there's a need to change the policy document (e.g., address change), the policy has an endorsement attached to it. - The latest declarations page will reflect the latest endorsement. - It's not uncommon for an insurance policy to have *dozens* of endorsements after a decade or two. For legal disputes, underwriters can issue a certificate of insurance to indicate that someone is insured on a particular date. - An insurance certificate doesn't amend or change the policy provisions, but can verify to another party that someone has insurance. ## Insurance rating When framing a policy document, an actuary will have created a rating by gathering as many statistical correlations as legally possible toward an insured opening a claim. - The rating is based on how much statistical exposure the insurer is adopting as a rate per hundred. - e.g., if a $100,000 risk has a precisely 1% chance of a total loss for the term across 100 units of the same risk, the formula will provide at least a $1,000 premium (but probably closer to $1,500). - It's a rate per exposure unit in property insurance, a rate per hundred of payroll in worker's comp, and rate by rate exposure in liability insurance. - This rating is critical to get correctly, since incorrect rating can lead to overinsurance (over-valuing the risks for what they're worth and over-charging) or underinsurance (not valuing the risks enough and harming the company). - There are *many* criteria they may use: - The property/liability being insured - Square foot area - Gross sales - Payroll - Construction of various components (e.g., roof, siding, safety features) - On large objects, the construction is *essential* (e.g., frame, masonry, noncombustible, fire resistive) - The proximity of that property to other things (e.g., fire departments, fire hydrants, etc.) - The location of the property or where it's garaged - The usage of that property (e.g., work, personal, commute, business) and whether it's vacant/occupied. - Vacancy is *both* the absence of people and possessions, while unoccupied is only the absence of people but with all the necessities for someone to live (e.g., food, utilities, bed, or room for customary business operations). - Most insurance doesn't cover vandalism, malicious mischief, broken glass, or burglary damages in a vacant property, as well as often not covering water damage or theft, and any covered losses are reduced by 15%. - If it's owner-occupied, at least 31% of the square footage must be occupied/rented for customary purposes. - Known risks that may exist (e.g., certain [dog](fun-pets.md) breeds, swimming pool, trampoline) - The region's historical meteorological history and past claims in the region (grouped by ZIP code) - Redlining involves clearly discriminating based on geographical region. - The insurance history of the insured pulled from a LexisNexis report (coverage amounts, prior insurance carriers, claims history, dates insured) - Financial history of the insured for the past 10 years (outstanding debt amount, foreclosures/bankruptcies) - Body type and gender - Age - Education level, occupation, military background - Architectural diagrams - Meteorological history of the region - Number of people in household or workplace - Payroll and job classifications - Family's genetic diseases, health history, and known psychological disorders - Accident and driving history for the past 5 years (though past 3 is most relevant) - Ethnicity, religion, and political views - Residence and employment history - Further, many ratings require consistent reporting on the behalf of the insured for even *more* clarity: - Seasonal changes in inventory stock - Intermediate stages in construction The [law](lawsaxioms.md) of adverse selection means people tend to only look for insurance when they think they may need it. - For that reason, insurance premiums must reflect that price difference to prevent the insurer from going bankrupt. - More [statistical](math-stat.md) data forms a Poisson distribution that makes the chances and scope of risk more accurate ([law of large numbers](lawsaxioms.md)). Ratings have different categories: - Manual/Class Rating - large homogenous groups that use specified rating criteria like construction type, location, protection class, and similar characteristics (frequent in most general insurance policies) - Individual/Judgment Rating - covering a specific risk after performing extensive risk analysis (almost exclusively a commercial insurance need) - Generally a catch-all solution when other risk categories don't apply. - Merit Rating - applies schedules and experience toward a specific risk (i.e., underwriter override) - Loss Cost Rating - uses loss costs published by a rating bureau, which insurers then add their expenses into ## Policy classes Most insurance has two major, independent components: - Liability (Casualty) - making payments for things the insured may be liable for. - Property - making payments to replace property that may get damaged. Many insurance policies are designed to have *both* liability and property coverage, according to use: - Personal lines policies cover personal, non-commercial use. - Personal policies include debris removal, fire department service charges, and preservation of property, as well as exposures like loss assessment coverage, credit card fraud coverage, and coverage for grave markers. - Recreational lines cover even less use than personal, and typically with the expectation of seasonal use. - Commercial lines policies cover the specific, frequent use necessary for businesses. - Commercial property policies include debris removal, fire department service charges, preservation of property, increased construction costs, and pollutant cleanup and removal. - Commercial insurance policies also typically extend to newly acquired property, personal effects and others' property, valuable papers, off-premises property, outdoor property, and non-owned detached trailers. - Most personal insurance has a commercial version with *much* more coverage. - Since a commercial policy is much more robust than a personal policy, it tends to also cover personal use of commercial property. - Excess and surplus lines are for hard-to-place exposures that aren't available or can't be procured through admitted/authorized markets. - These forms of insurance have to be proven to *not* fit into any conventional insurance framework, and can't compete on price against admitted companies. There are a few exceptions to property and liability/casualty: - In health insurance, the payments are determined based on care needed/provided. - In life insurance, the payment is simply a defined claim payment upon [death](hardship-death.md) that also terminates the policy (i.e., it's death insurance). Insurance clarifies precise perils with a few basic formats: - Specified/named peril policies list everything the policy *does* insure: - Basic form policies cover the most likely perils (e.g., fire, smoke, wind/hail, lightning, explosion, aircraft/vehicles, riot/civil commotion, vandalism, sprinkler leakage, sinkhole collapse, volcanic action) - Broad form policies cover everything in basic form, with more unlikely things (e.g., falling objects, weight of snow/ice/sleet, water damage). - Special form/all risk/open peril policies cover absolutely *everything*, minus specified exclusions (e.g., freezing objects, theft, earthquake). With some exceptions, the possessions of a typical person fit under a homeowner's policy. - Homeowners policies cover the "estate" of a person, *not* just the dwelling: - Dwelling insurance covers *only* the dwelling itself, and is what most people think of when they think homeowners insurance. - Homeowners also has liability and property coverage for things *on* that dwelling (e.g., shed, garage, tools). - It also covers liability protection against [legal issues](legal-safety.md) like defamation. - It also has property protection for possessions while traveling (e.g., [vacations](fun-vacations.md)). - A renters' policy is simply a homeowners' policy, minus the dwelling. - To protect something in a policy with more coverages, most agents can endorse a floater: - Personal articles floater (PAF) insures valuable personal property from all direct physical loss except war, nuclear risks, deterioration and decomposition, inherent vice, and insects/vermin. - Personal effects floater and personal property floater are other variations. - A person's property and liability extends out to other domains that typically operate as an entirely different insurance policy: - Animal insurance (e.g., [pets](fun-pets.md)) - [Auto](autos.md) insurance - Aviation insurance - Concealed carry insurance (for gun ownership in a population-dense area) - Cyber liability - Cycle insurance (e.g., motorcycles, ATVs) - Disability insurance - Watercraft insurance - Inland marine - Ocean marine - Mobile home and RV insurance - Snowmobile insurance Large-scale perils (e.g., earthquakes) can easily bankrupt an insurance company, so they tend to be separated as excess and surplus lines: - Crop/hail insurance - Fire insurance - Flood insurance Many businesses have larger, more specific needs, and is a key part of any Human Resources department: - [Annuities](money-investing.md) - Boiler and machinery insurance - Businessowners insurance, like homeowners' policies, combines various coverages into a standard package - Directs and officers liability insurance - Employment practices liability - Cargo insurance protects either a class of cargo or specific shipments [in transit](logistics.md). - Fidelity and crime insurance, which protects against both burglary (forced entry/exit) and robbery (taking with violence/threats) of *any* property - Farm insurance - Furrier's block coverage is inland marine coverage for a fur dealer - Garage and dealers insurance - Glass and sign insurance - Group policies are *any* policy purchased in bulk (and typically discounted). - If a large organization serves many clients with their [contract](people-contracts.md) requiring insurance (e.g., rental property, auto lien), they can have their own force-placed insurance policy and send the bill to *their* client. - Furrier's block coverage is inland marine coverage for a jewelry dealer - Hole-in-one insurance for golf courses that run promotions for hitting a hole in one - Installation/builders risk - Linebacker insurance - Liquor liability insurance - Pollution liability insurance - Professional errors and omissions insurance protects the liability of a professional in the course of their work. - Malpractice insurance is designated specifically for high-ranking roles (e.g., attorneys and doctors) - Stop-loss/excess insurance (for companies who self-insure benefit plans but want liability protection) - Surety bond - a three-party [written agreement](people-contracts.md) where a principal pays a surety/insurance company to guarantee performance (and possibly pay) an obligee - Bail bonds - [Transportation](logistics.md) insurance - Truckers insurance - Weather insurance - Worker's compensation insurance (for on-the-job medical damages and lost wages) - Assigned risk plans cover workers comp plans that can't be insured through conventional policies (due to being [unprecedented new industries](entrepreneur-1_why.md) or high-risk) Other insurance can serve to accommodate additional liability needs. - An umbrella policy is excess liability insurance after the other policies' liability amounts have capped off. - Commercial excess insurance is an umbrella policy for commercial policies. - Reinsurance is insurance policies issued for insurance companies.