Insurance Policies 101 – Understanding Insurance Policies and Claims
January 28, 2009
Insurance is one of the financial products bought regularly that most people do not understand. Whether it’s health, life, homeowner’s, or auto insurance, most people buy a policy and file it away without fully reading it.
This is one of the major reasons why so many people feel screwed over by insurance companies when it comes time to make a claim, they don’t understand what they bought. Of course another part of it is that insurance companies write policy contracts to protect themselves from taking on too much exposure to risk. Hopefully, by the end of this article you will understand insurance policies better and why insurance has a bad reputation.
Insurance policies are a unilateral contract
In a unilateral contract, only one party to the contract makes a promise. An example is offering a reward to someone that finds a missing pet. Party A offers to pay a reward if party B finds A’s dog. But, B is not required to find A’s dog. But if B does find A’s dog, A is required to pay the reward. Insurance contracts work the same way.
The insurance carrier offers to pay claims in exchange for a premium from the policyholder. The policyholder is not required to pay a premium to the insurance company, but if the policyholder does pay the premium, the insurance company IS required to pay claims based on the terms of the contract.
This shifts the burden of proof to the insurance company. They must prove or disprove that they are required to pay a claim if there is a discrepancy, because they are contractually obligated to fulfill a promise to pay claims. This is very important to remember when filing a claim, and I will get into the significance of burden of proof when I write an article about the claims process.
Insurance policies are a contract of adhesion
A contract of adhesion is a contract between two parties that does not allow for negotiation. It is a “take it or leave it” contract that often favors the party that wrote the contract. There is no power to negotiate, because one party often has an unequal bargaining position.
This is the single biggest reason why so many conflicts arise between insurance companies and their policyholders. The policyholder feels that the insurance company should fulfill their promise to pay claims at all times as long as they are paying a premium, but the contract they signed was a standard form that often benefits the insurance company.
The standard form is written to protect the insurance company from too much exposure to risk. This is done in such a way to allow the insurance company to turn a profit, even when they pay claims on a daily basis.
The state and federal court system will often side with the policyholder in a dispute for the very reason that insurance contracts are contracts of adhesion. Courts know that these contracts favor the insurance company, so often ambiguity in the language of the contract will be favored toward the policyholder.
Always remember this when your insurance company denies a claim based on contract language that could be a gray area. Insurance companies know that courts favor the policyholder, so they try to avoid claims going before a judge and/or a jury.
The Four Main Sections of an Insurance Policy
This section defines certain keywords in an insurance contract. It is important to read these definitions, because your definition of a certain word may be different from the insurance company’s definition.
This section will define what IS covered under the policy. This section is usually pretty simple, and the contract focuses more on what IS NOT covered. The reason it’s a small section is because many insurance contracts are an ALL PERILS contract which means everything is covered unless it is specifically excluded in the policy.
This section is obvious. It’s long, complicated, and covers many situations in which the policy does NOT afford coverage. Make sure you read this section thoroughly.
This section outlines that conditions must be met by the policyholder in order for the insurance carrier to fulfill their promise of paying claims. If you do not meet a condition of the policy, this does not mean that the contract is void. It just means that the insurance company builds their case for not paying a claim if they choose not to. However, most insurance companies do not reject a claim based on a failure to comply with conditions unless it is an obvious failure to comply with the condition.
Know What You Are Buying
Many people think their declaration page is their insurance policy, this is not true. A declaration page is only a snapshot of your specific coverage amounts, deductibles, endorsements attached to the policy, and other relevant information.
The actual policy should be sent to you in the mail after you have signed the dotted line. This is why you are paying a premium. This contract is the language that claims adjusters will quote if they reject your claim.
That is why it is so important to read your policy, ask questions directed to your agent, and do your own research online before you meet with an insurance agent. I was an underwriter and then a claims adjuster for an insurance company for four years. I know pretty much everything about the business, and I know exactly how insurance companies and adjusters operate.
Stick with me for the next few articles and I will help you save a lot of money on buying insurance and help you receive the claims money you deserve.
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