Introduction to Insurance Contracts

Insurance policies are legal contracts between the insurance company and the insured.

As with any contract, there must be three basic elements: An offer, acceptance and consideration. For insurance contracts the offer is actually originated by the prospect not the insurance company or agent. This offer is in the form of an application. Once the application is completed and payment is made, the insurance company then decides whether or not to accept the offer. The combination of the offer and the acceptance is known as the agreement. The consideration is the premium paid by the insured and the promise to pay a covered claim by the insurance company. This is commonly called a unilateral contract. Keep in mind, the contract must be for a legal purpose. You cannot buy a policy with the intent to kill the insured so you can collect the proceeds. Both parties of the contract must also be competent and understand the terms of the contract.

There are generally five parts to each contract:

• Declarations:The declarations are typically found on the first page of the policy and include general information such as name of the insured, address, coverage amount, a description of the property, the term of the policy and the cost of the policy.
• Agreements:The insuring agreement section of the policy a description of the property and the perils against which it is insured.
• Conditions:The conditions section describes the responsibilities and obligations of both parties.
• Exclusions:The exclusions section lists the types of losses for which the insured is not covered.
• Definitions:The definitions section clarifies the meaning of many of the terms that are used throughout the policy.

A binder is a temporary insurance contract, oral or written, issued before a policy is written. For example, when you buy a new motorcycle your agent may tell you the motorcycle is covered immediately and for the next 60 days. This is know as a binder. It guarantees temporary coverage until a permanent policy can be issued. It does not guarantee that a permanent policy will be issued, but rather guarantees temporary coverage.

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