AN important step in obtaining an insurance is preparing the policy. Many are still misguided about the nitty-gritty of an insurance policy which could lead to unknowingly consenting to an agreement they know little about and may have harmful consequences later. Often, this could be due to the tendency to skip over lengthy, difficult and boring texts, or maybe due to lack of sufficient knowledge about the potentially harmful consequences of consenting to an agreement they know little about.
This article provides some insights on the critical parts of an insurance policy, a key document which essentially signifies an agreement between the policyholder and the insurer that the latter will cover for the losses suffered by the former in case the perils or dangers stated in the contract happen.
Because an insurance policy is a contract, consent of the parties involved is sufficient to perfect it. However, insurance laws still require the insurer to issue a printed form of the contract (the insurance policy) wherein the buyer of insurance signs to indicate his consent. Electronic versions are also allowed, and by clicking the “I agree” button after reviewing the online application form, the buyer of insurance is in effect providing his consent to the provisions written in the contract.
The policy issued by the insurer must be approved by the Insurance Commissioner, including revisions or changes from standard policy wording. Other pertinent documents, such as the application form, cover notes or binders, riders, warranty and endorsements, should be submitted to the Insurance Commissioner as well for approval.
The terms and conditions of an insurance policy should not be against the law, moral, customs and public policy. There are also standard policies approved by the Insurance Commission to be used by the insurance companies, such as Standard Fire Policy and Standard Life Insurance Policy.
Furthermore, there are also mandatory provisions under the Insurance Code which should be included in some types of insurance such as individual life, endowment insurance, group life, and industrial life. Lastly, to allow more flexibility in creating insurance products while maintaining the integrity of the industry, the Insurance Commission has issued guidelines on the form of non-life insurance policy.
The provisions in an insurance policy may be categorized into i) declarations, ii) insuring agreements, iii) exclusions, and iv) conditions. The basic provisions which must be in all types of insurance policies are usually listed down in the Declarations, such as the identity of the insurer, insured, and the assured; the amount to be insured except in cases of open running policies; the premium; property or life insured; the interest of the insured in property insured, if he is not the absolute owner of such property; the risks insured against; and the period during which the insurance is to be effective. The Insuring Agreements specify the obligations of the insurer and describe the characteristics of the events covered while the Exclusion provisions state the coverage limits. Terms, definitions and basis for the premium computations may be found under Conditions other than the requirements that must be complied with by the insured to have a valid claim.
The person or persons who consented to contract an insurance agreement and the insuring entities are central in an insurance agreement, thus, their identification must be explicit in the contract. It must be noted, however, that the life of a person being insured who is not the buyer of the contract, need not be considered as a consenting party.
If the insurance involves a beneficiary, his or her designation must be made in clear terms, ideally by stating the complete name. In the absence of a name, the designation may still be valid if the identity of the beneficiary is sufficiently determinable. There are rules in the law which may help clarify the designation. An example would be if the designated beneficiaries are the “children”; this group includes adopted children and children by the wife designated as beneficiary and children of a previous marriage. Illegitimate children are also considered accepted in this beneficiary group.
The amount insured should naturally form part of the policy as it fixes the liability of the issuing insurance company. This value varies depending on the type or cause of loss, or injuries in case of health insurance. It may also change depending on the whether the conditions stated in the policy were followed. For example, a car insurance policy states that for the full repair cost to be covered, the car should be repaired in a shop selected or accredited by the insurer. Otherwise, the insured may only recover a minimal amount fixed in the policy.
Aside from the money that could be claimed, an insurance policy also spells out the premium to be paid, either the exact amount or its determinable amount.
Moreover, specifying the insured person or property is fundamental in an insurance policy. The ‘insured’ is the person whose life is insured, which could be someone other than the person who took out the insurance for him or her, also known as the ‘assured.’ If the insured is described in generic terms, say “registered owner” of a car, only people who can show it was intended to include him or her can claim the benefit of the policy. A registered car owner can provide proof by presenting the certificate of car registration. The insured may also show that he or she qualifies under the coverage indicated in a policy where the ‘insured’ is identified in general terms (i.e. passengers in a vehicle with compulsory third-party liability insurance). Insurance laws also provide for determination of the real policy owner when agents, trustees, co-owners and partners are involved.
In property insurance, the property being insured and the interest of the person obtaining the policy must appear on the policy, in clear terms, leaving no room to doubt its identity. However, the true intention (interest) of the parties which could be determined may provide as a basis in identifying the property insured if the description is deemed erroneous.
Finally, the policy must also clearly list down all the risks being insured against, which must be contingent or unknown and will bring about damage to the insured or create a liability to him or her if they suddenly occur. If risks are discernible and specific, a policy is called a “named-peril” policy. On the other hand, an “all risk policy” takes on all risks of an accidental nature, and the burden of proof lies with the insurer to show that there is an exception to the coverage.