The document discusses key concepts in insurance contracts including: - The principle of indemnity states that the insurer will pay no more than the actual loss amount to avoid profiting from a loss. - Actual cash value considers depreciation and market factors to determine property value. - Subrogation allows the insurer to recover losses from negligent third parties. - Common parts of insurance contracts include declarations, definitions, insuring agreements, exclusions, conditions, and miscellaneous provisions.

1. • Sholpan Aitenova
Insurance
Business

2. Lecture: Topic 4 Lecture 4: Analysis of Insurance Contracts

3. Principle of Indemnity
• The principle of indemnity states that the insurer agrees to pay no
more than the actual amount of the loss; stated differently, the
insured should not profit from a loss.
• 1) prevent the insured from profiting from a loss,
• 2) reduce moral hazard
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4. • Principle of utmost good faith – that is, a higher degree of honesty is
imposed on both parties to an insurance contract than is imposed on
parties to other contracts

5. Actual Cash Value
• Replacement cost less depreciation, to determine actual cash value
of property in property insurance, takes both inflation and
depreciation
• Fair market value, the price a willing buyer would pay a willing seller
in a free market
• Broad evidence rule, the determination of actual cash value should
include all relevant factors an expert would use to determine the
value of the property
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6. Principle of Subrogation
• Subrogation means substitution of the insurer in place of the insured
for the purpose of claiming indemnity from a third person for a loss
covered by insurance. Stated differently, the insurer is entitled to
recover from a negligent third party any loss payments made to the
insured.
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7. Purpose of Subrogation
• Subrogation prevents the insured from collecting twice for the same
loss
• Subrogation is used to hold the negligent person responsible for the
loss
• Subrogation helps to hold down insurance rates
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8. Requirements of an insurance contract
• Offer and Acceptance
• A binder is a temporary contracts for insurance and can be either written or
oral form
• Conditional premium receipt
• Consideration, the value that each party gives to other
• Competent parties, parties have legal capacity to enter into a binding
contract
• Legal purpose, legal activities
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9. Distinct legal characteristics of insurance
contracts
• Aleatory contracts, a contract where the values exchanged may not
be equal but depend on an uncertain event
• Commutative contract, the values exchanges by both parties are theoretically
equal
• Unilateral Contract, only one party makes a legally enforceable
promise
• Conditional Contract, provisions inserted in the policy that qualify or
place limitations on the insurer's promise to perform
• Personal Contract, a contract between insurer and insured
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10. Basic Parts of an Insurance Contract
• Declaration
• Definitions
• Insuring agreement
• Exclusions
• Conditions
• Miscellaneous provisions
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11. Declarations
• Statements that provide information about the particular property or
activity to be insured
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12. Definitions
• Key words or phrases have quotation marks around them or are in
boldface type
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13. Insuring agreement
• Summarizes the major promises of the insurer
• (1) named-perils coverage, only those perils specifically identified in the policy
are covered
• (2) “all-risk” coverage, all losses are covered except those losses specifically
excluded (risk of direct physical loss to property)
• To deny payment, the insurer must prove that the loss is excluded. In contrast,
under a named-perils contract, the burden of proof is on the insured to show
that the loss was caused by a named peril
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14. Exclusion
• Excluded perils
• Excluded losses
• Excluded property
• Reasons for exclusion:
• Some perils considered uninsurable
• Presence of extraordinary hazards
• Coverage provided by other contracts
• Moral hazard problems
• Coverage not needed by typical insureds
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15. Conditions
• Provisions in the policy that qualify or place limitations on the
insurer’s promise to perform
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16. Miscellaneous provisions
• Property and casualty insurance:
• Cancelation
• Subrogation
• Requirements
• Life and health insurance:
• Grace period
• Reinstatement of a lapsed policy
• Misstatement of age
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17. Definition of the “Insured”
• One person, most life insurance contacts
• Formal definition of the named insureds:
• Named insured is the person or persons named in the declaration section of
the policy
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18. Endorsements & Riders
• In property and casualty insurance, an endorsement is a written
provision that adds to, deletes from, or modifies the provisions in the
original contract. In life and health insurance, a rider is a provision
that amends or changes the original policy
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19. Deductibles
• Deductibles is a provision by which a specifies amount is subtracted
from the total loss payment that otherwise would be payable
• Purpose:
• The eliminate small claims
• To reduce premiums
• To reduce moral and morale hazards
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20. Deductibles in Property Insurance
• Straight deductible, the insured must pay a certain amount of money
of loss before the insurer is required to make a payment
• Aggregate deductible means that all losses that occur during a
specified time period, usually a policy year, are accumulated to satisfy
the deductible amount
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21. Deductibles in Health Insurance
• Calendar-year deductible is a type of aggregate deductible that is
found in basic medical expenses and major medical expenses
• Corridor deductible is a deductible that can be used to integrate a
basic medical expense plan with a supplemental major medical
expense loan
• Elimination (Waiting) period is a stated period of time at the
beginning of a los during which no insurance benefits are paid
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22. Coinsurance
• Nature of coinsurance in a property insurance contract encourages
the insured to insure the property to a stated percentage of its
insurable value. If the coinsurance requirements is not met at the
time of loss, the insured must share in the loss as a coinsurer
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23. Coinsurance (2)
• Fundamental purpose of coinsurance is to achieve equity in rating
• If the coinsurance requirement is met, the insured receives a rate
discount, and the policyowners who is underinsured is penalized
through application of the coinsurance formula
• Coinsurance in health insurance – percentage participation clause
• (1) to reduce premiums
• (2) prevent overutilization of policy benefits
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24. Other insurance provision
• Pro rata liability, each insurer's share of the loss is based on the
proportion that its insurance bears to the total amount of insurance
on the property
• Basic purpose of the pro rata liability clause is to preserve the principle of
indemnity and to prevent profiting from insurance
• Contribution by equal shares
• Primary and Excess Insurance, coordination-of-benefits provision
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