Chapter 2

Policy Provisions and Contract Law

Insurance Terms and Related Concepts: 28%

Policy Provisions and Contract Law: 24%
Types of Property Policies: 10%
Types of Casualty Policies: 13%
TN Laws and Departmental Rules: 14%
TN Laws and Departmental Rules for PL Only: 11%

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Terms to Know
Appraisal – a professional assessment to determine the extent of damage
Earned premium – the portion of premium paid in advance that now belongs to the insurer for providing coverage
for a specified period of time
Liberalization – the removal or loosening of restrictions
Negligence – the failure to use care that a reasonable, prudent person would have used in a similar situation
Policyowner – the person entitled to exercise the rights and privileges in the policy
Third Party – an individual or entity other than the insured or insurer, “the other person”
Underwriting – risk selection; the process of reviewing applications for insurance to determine eligibility for coverage

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 What are the Elements of a Legal Contract?

Consideration Legal Purpose Agreement Competent Parties

Insured gives their Not against the law or Insured makes an offer by Legal Age
representations and pays public policy submitting an application Mentally Competent
their premium and the insurer gives
acceptance when they Sober
Insurer pays claims
approve the application

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 What are an applicant’s considerations?
An applicant's considerations are the premium and the representations made on the application.

A misrepresentation is an untrue
statement on an application.

What are the representations made on an application?

Representations are the answers the insured gives to questions on the insurance application.
They are statements that are believed to be true, but not guaranteed to be true.

Have you ever filled out a background check for a job application? They want to know
everything. The worst part is when they ask where you’ve lived for the past 17 years. I
fill those out to the best of my ability! Those are an example of representations. I
believe them to be true, but I can’t guarantee it.

Another example, would be if Ed answered “no” on a health insurance application

asking if he’d ever had cancer. A few weeks later, he is diagnosed with an advanced
form of cancer. While his representation was proven untrue (he actually had cancer at
the time of the application), and even though if the insurer had known they would
have denied his application, the policy remains in place. This is because it was a
statement Ed believed to be true, but wasn’t guaranteed to be true

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Statements on Applications

A warranty is an absolutely true statement.

If a warranty is found to be untrue,
it can be grounds for voiding a policy.

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What is Concealment?

Concealment is intentionally withholding information.

It is intentionally not telling an insurer something that if the insurer knew,
would effect underwriting and the decision to approve an application.

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What is Fraud?

Fraud is an intentional misrepresentation.

It is an intentional untrue statement.

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What is a Binder?

A binder is a temporary contract of insurance issued by an insurer or its agent

that provides temporary coverage until the actual insurance policy is issued

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 Policy Structure

Declarations who, what, how much

Definitions terms used in the policy

parties involved, effective / renewal dates,

Insuring Agreement description of coverages, and perils covered
Coverage for claims-related expenses, reasonable
Additional (Supplementary) Coverage expenses to protect damaged property, etc

Conditions rules and procedures under the policy

Endorsements additions or changes that change the policy

Exclusions what or who is not covered

Declarations is the section of an insurance policy containing the basic underwriting

information, such as the insured's name, address, amount of coverage and premiums,
and a description of insured locations. It also contains any supplemental
representations by the insured. This is usually the first page of the policy.

The definitions component of an insurance policy clarifies terms used in the policy.
Typically, words that are printed in bold, italics, or quotations have a definition as to
their meaning in that contract.

An Insuring Agreement (sometimes labeled Agreement) is the section of an insurance

policy that establishes the obligation of the insurance company to provide the
insurance coverages as stated in the policy. Among other things, the insuring
agreement lists the parties to the contract, effective and renewal dates, the
description of coverage provided, and perils. It is usually found after policy
Declarations, but may be placed after Definitions.

Conditions is the section of an insurance policy that indicates the general rules or
procedures that the insurer and insured agree to follow under the terms of the policy.
Following are examples of conditions: • Inspections may be made as needed by the

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insurer. The insurance company reserves the right to inspect or examine the insured's
location or books to determine the exact exposure for underwriting and rating
purposes. • Changes to the policy must be made by the insurer and be in writing. •
The liberalization clause ensures that if the insurer introduces an improved free
coverage, the insured will get the benefit of the new coverage immediately and will
not have to wait for policy renewal. • Return of premium dictates the method that
will be used to calculate the return premium when the policy is cancelled before the
expiration date.

The exclusions section of an insurance policy details the perils that are not insured
against and what persons are not insured. Exclusions restrict some of the broad terms
used in the insuring agreement. This section can exclude people (except a spouse),
property, and perils.

Endorsements are printed addendums to a contract that are used to change the
policy's original terms, conditions, or coverages. Endorsements may be included at
the time the policy is issued or added during the policy term. Endorsements must be
in writing, attached to the policy and signed by an executive officer of the insurer to
have any effect on the contract. Endorsement may be used to add or delete coverage,
or may be used to correct items such as the insured name, address, etc.

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Policy Structure

Declarations
Endorsements
Additional or Supplementary coverage
Definitions

Insuring Agreement
Conditions
Exclusions

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Declarations

Who is the Insurer and the Insured?

What is insured?

Where is it located?

When is the policy period?

How much is the premium and amount of coverage?

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Endorsements
Endorsements are printed addendums (additions) to a contract that are used to
change the policy’s original terms, conditions, or coverages.

Endorsements may be included at the time the policy is issued or added during the policy term. Endorsements
may be used to add or delete coverage, or to correct items such as the insured name, address, etc.

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Additional Coverages
Additional coverage is a provision in an insurance policy that provides an additional
amount of coverage for specific loss expense, at no additional premium.

Specific loss expenses such as claim-related expenses, reasonable expenses incurred by

an insured to protect damaged property from further loss, and defense expenses.

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Definitions
The Definitions component of an insurance policy clarifies terms used in the policy.

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Insuring Agreement
An Insuring Agreement is the section of an insurance policy that establishes the obligation
of the insurance company to provide the insurance coverages as stated in the policy.

Among other things, the insuring agreement lists the parties to the contract, effective and
renewal dates, the description of coverage provided, and perils that are covered.

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Conditions
Conditions is the section of an insurance policy that indicates the general rules or
procedures that the insurer and insured agree to follow under the terms of the policy.

Inspections may be made as needed by the insurer.

Changes to the policy must be made by the insurer and in writing.
Liberalization Clause ensures that if the insurer introduces an improved free
coverage, the insured will get the benefit of the new coverage immediately and
will not have to wait for policy renewal.
Return of Premium dictates the method that will be used to calculate the return
premium when the policy is cancelled before the expiration date.

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Exclusions
The exclusions section is the section that details the perils that are not
insured against and what persons are not insured.

Spouses cannot be excluded

Earth movement is excluded if caused by earthquake, mudflow, or volcanic

eruption

Under the water damage exclusion, the following perils are not covered: flood
and subsurface water, water from sewers and drains or sump pump overflows

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Insureds
First Named Insured
The individual whose name
appears first on the policy
declarations
Named Insured
The individual(s) whose name
appears on the policy
declarations
Additional Insureds
Not named as insured in the
declarations, but added by
endorsement

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Appraisal ($)

If there is a disagreement between the insured and the insurer on the

value ($) of any property loss, either party can make a written demand
for an appraisal.

Each party will select a competent appraiser who will then select an
umpire if they are unable to agree on a fair value.

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Other Insurance
Other Insurance is a provision in an insurance policy that defines how the policy
will respond if there is other valid insurance written on the same risk.

$40,000 $60,000

Pro rata is a provision found in some property insurance policies that provides for the sharing
of loss with other insurance that may be written on the same risk in the same proportion as
their limits of insurance.

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Notice of Claim vs. Proof of Loss

Notice of Claim
Notifying the insurer of a loss (verbal / written; usually a phone call)

Proof of Loss
Sworn written statement that must be given to the insurer before
they will pay for a loss

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Cancellation vs. Nonrenewal

Cancellation Nonrenewal
Cancellation is the termination of an in- Nonrenewal is the termination of an
force insurance policy, by either the insurance policy at the expiration date by
insured or the insurer, before the not offering a continuation of the existing
expiration date. or replacement policy.

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 What is a Mortgagee Clause?

It protects the interest of the mortgagee on a

mortgaged property

It states that the mortgagee will be reimbursed for their

part of a loss in the event of a covered peril

It also states that the mortgagee will be reimbursed

even if the insured was negligent

The insured must have an insurable interest in the person or property covered by an
insurance policy. In property insurance, this means the insured would incur a financial
loss if the insured property was damaged. As a result, an insurable interest may be
created by the ownership, custody or control of a property.

Example: Kim owns a restaurant. I eat there every day because they have the best
Mac and Cheese. Do I have an insurable interest in the business since I eat there
everyday? No, I don’t. Let’s assume that Kim has a mortgage for her restaurant’s
building. Does the mortgagee have insurable interest in the restaurant? They do. Both
Kim and the mortgagee stand to incur a financial loss if there is property damage.
They both have insurable interest in the restaurant.

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Sources of Underwriting

Part of the underwriting process is to determine

whether or not the applicant is insurable
Application Form
Motor Vehicle Records
Interviews with neighbors, friends, and employers
Inspection of property
Inspection of insurance history

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Fair Credit Reporting Act
FCRA seeks to ensure that records are confidential,
accurate, relevant, and properly used. It also protects
consumers against the circulation of inaccurate or
obsolete personal or financial information.
Consumer Reports include information collected from employment
records, credit reports, and other public sources.

Investigative Consumer Reports include additional information from

investigation and interviews with associates, friends, or neighbors of
the consumer (insured)

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Gramm-Leach-Bliley Act

This act states that an insurance company may not disclose

nonpublic personal information to a nonaffiliated third party.

The customer must be notified when the policy is purchased

and before the information is actually disclosed to a third
party

It also requires that the insured have the option to opt out of
having this information shared

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Terrorism Risk Insurance Act (TRIA)

Created to provide a temporary federal program to share the

risk of loss from future terrorist attacks with insurers

An act of terrorism is an act certified by the Secretary of the

Treasury, Secretary of Homeland Security, and the Attorney
General

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