An insurance contract is a legally binding agreement creating rights and duties for the two parties to an insurance policy (the insurer and the insured).
While there are seven essentials of a valid insurance contract, There are five main parts of an insurance contract (or policy) namely: declarations, definitions, insuring agreements, exclusions and limitations and conditions
1. Declarations: This is the first part of an insurance contract.
Declarations are statements that provide details about the property or activity that the insurance policy will cover.
They describe the what, when and who of an insurance policy.
That is, it contains information about the insurer, the insured, the policy type, and the premium to be paid by the insured.
Declarations are normally located on the opening page of a policy and may include the following information:
A. The full name of the insured
B. Location of property
C. If relevant, the insured's age
D. Period of protection
E. Coverage amount
F. Amount of premium
G. Size of the deductible, and
H. Policy number, if applicable.
I. If applicable, the date of issue
J. Other relevant information
2. Definitions: These are usually one or two pages long in insurance contracts.
The definition section of an insurance contract, as its name suggests, defines numerous words, concepts, and phrases used in an insurance contract.
In most insurance contracts, words like "we," "our," and "us" refer to the insurer, while "you," "your" refer to the insured.
These words are used to define phrases use in insurance contracts.
3. Insuring agreements: This is the major part of an insurance contract.
It is the heart of an insurance contract and summarizes the major promise of the insurer.
To put it another way, it enumerates everything the insurer promised to do or not do as part of the contract.
Insuring agreement usually spelt out the services provided by the insurer, the nature and scope of the insurance contract.
Furthermore, the circumstances under which the policy becomes applicable are described in the insuring agreement
The circumstances or the loss-causing event is called peril by the insurance practitioner.
Based on the specification of peril, there are two major types of insurance agreements: all-risk coverage and named-peril coverage.
A. All-risk coverage: This covers all peril-related losses, except those that are specifically excluded in an insurance contract.
That is, if a loss is caused by a peril not specifically excluded in the insurance policy, then it is covered.
All-risk coverage is most popular with property insurance policies.
The exclusions in an all-risk policy are more definitive of coverage than in a named-perils policy.
All-risk coverage, in general, provides more coverage than a named-perils policy.
As a result, it necessitates a greater premium than a named-peril policy.
It's worth noting that all-risk insurance policies are also known as open-perils policies.
B. Named-perils coverage: This only covers losses caused by perils that are specified in the insurance policy.
If a peril isn't listed, the loss resulting from it is not covered
All perils not included in the insurance contract are not covered in named-peril coverage.
4. Limitations and exclusions: An important aspect of an insurance contract is the exclusions and limitations section.
Perils, hazards, losses, and properties that are excluded from the insurance policy's coverage are usually listed in the exclusion section.
Exclusion is one of the most important parts of an insurance contract as it explicitly identifies losses that are not covered by the policy.
The exclusion part of an insurance contract informs the insured of what is not covered.
Similarly, the limitation part of an insurance company specifies the maximum amount payable under the insurance contract.
Simply put, limitations state the maximum amount of money that an insurance company will payout for a claim in a policy period as specified on the insurance policy.
5. Conditions: An insurance contract is a conditional contract.
As such, It must include a section for conditions.
Conditions are provisions or clauses in insurance policies that qualify or limit the insurer's promise to perform.
If policy conditions are not met, the insurer can refuse to pay.
Conditions imposed certain duties on the insured. They describe the insured obligation under the agreement.
Only if a fact fits the terms outlined in the insurance contract can the insurance contract be enforced.
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Common policy conditions include:
A. Notifying the insurer in the event of a loss
B. Submitting proof of loss to the insurance company
C. Protecting the property after a loss
D. Cooperating with the insurer in the event of a liability suit.
E. Preparing an inventory of damaged personal property.
If the insured does not obey the conditions listed in the insurance contract, he or she may not receive the loss compensation.