About Insurance Policies

What Is An Insurance Policy?

An insurance policy is a document that legally binds an insurance company (the Insurer) and an individual, or entity (the Insured) for protection against certain losses. The policy outlines the terms of the coverage: what is covered, what is not covered, or excluded, and the maximum amount that will be paid out.

What Are The Basic Parts Of An Insurance Policy?

Insurance policies typically include several key components that help protect you and your assets. These sections include:

1. 1. The declarations page, which is usually the first part of the policy, outlines essential information about the policyholder and the coverage as who, what, how long and certain limits if any exists.
   2. The insuring agreement is a summary of the promises made by the insurance company and details what is covered and under what circumstances.
   3. The exclusions section specifies what is not covered by the policy. The three major things that take away form an insuring agreement are: Excluded perils or causes of loss, Excluded losses, and Excluded property.
   4. The Conditions section that names the provisions that are inserted in the policy that place limitations on the insurer’s promise to pay out. If the policy conditions are not met, the insurer can deny the claim.
   5. Additionally, you will find definitions, endorsements and riders that state the obligations of both the insurer and the insured, as well as endorsements or riders that adjust the coverage to meet specific needs.

Understanding these main components can help you make informed decisions about the insurance protection you need.

How Does An Insurance Policy Work?

There are four steps that an insurance company and a policy holder take to make an insurance policy work.

1. 1. Insurance companies collect premiums from many policyholders (called Risk Pooling). This pool of money is used to pay the claims of the few policyholders who suffer a covered loss within a given year.
   2. Policyholders make payments as agreed upon (called Premium Payments) to keep the policy active. Premium cost depends upon the risks associated with the individual or property being insured.
   3. Filing A Claim is the formal request for money made to the insurance company by the insured individual.
   4. Payout is when the insurance company pays (if the claim is approved) the policy holder the covered costs up to the policy’s limit, minus any deductible, copay, or coinsurance.

What Is An Insurance Policy Based Upon?

An insurance policy depends upon the following principles which bind both the insurer and the insured.

1. 1. Utmost Good Faith – Ensuring honesty
   2. Insurable Interest – Financial stake in the policy
   3. Indemnity – Compensation for actual loss
   4. Subrogation – Recovery from responsible parties
   5. Contribution – Sharing of losses among multiple insurers
   6. Proximate Cause – Payment based on the primary cause of a loss
   7. Loss Minimization – The insured’s duty to minimize damages