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How You Can Properly Understand Your Insurance Contract - 1

There are myriad categories of insurance plans and they all carry varying terms and conditions. A large amount of people worldwide possess an insurance plan and it would be great to extensively understand the terms involved in an insurance plan before choosing one. What we generally do when handed the insurance policy document is just to glance through it without fully understanding the whole terms involved. In difficult cases where you fail to understand the terms in an insurance contract, it is wise to call on your insurance advisor to help you understand some tricky terms that may be found in the insurance form. This objective of this article is to help you understand some basic principles and terms that might found in your insurance contract.

Insurance Contract Essentials

Offer: When you fill out the requested details of an insurance company’s proposal form and send it back to them (sometimes with a premium check). It is known as your offer.

Acceptance: If after reviewing your submitted form (offer) and the company finds it worthy of insuring you maybe with little changes to your proposed terms, it is known as acceptance.

Consideration: This is the premium or future premium you have to pay your insurance during the course of your insurance plan. Consideration also represents the amount of money you can fully be paid should you file an insurance claim. Invariably, this means each party to the contract would need to bring some value to the relationship.

Legal Capacity: It deals with your ability to go into an insurance contract with an insurance company. You need to be legally competent to reach an agreement with the insurance company. If you are below the stated legal age or mentally ill, this can minimize your chances of going into an agreement with an insurance company.

Legal Purpose: Your contract must not be to support illegal activities otherwise it is invalid.

Contract Values

Most insurance contracts are handled as indemnity contracts. The type of contract is such that the losses incurred in an insurance policy can be measured in terms of money. 

Principles of indemnity

The aim of any insurance contract is to put you in the same financial situation you were in prior to the incident culminating in an insurance claim. The principle of indemnity states that insurers don't have to pay more than the volume of loss incurred. Invariably, it means that you will get compensated for your losses based on what you have accumulated over the years.

Under-insurance: most times, to avoid paying extra premiums, some individuals ensure their properties at a lesser amount. This is not a good practice and should be totally avoided. If such an insurance premium strategy is chosen, at the time of partial loss, your insurer is mandated to only pay the amount you produced for the property while you have to cover the cost for the remaining portion of the loss.

Excess: this is a provision offered by the insurance company to take care of losses if it exceeds a set fee. For example, if you possess a property insurance with the applicable excess of $4,000. Unfortunately, the property got damaged with a loss totaling to $6,000. The insurance company is mandated to pay you the $6,000 because the loss has exceeded the specified limit of $4,000. But, if the loss comes to $2,000 then the insurance company is not required to pay a single dime and you have to bear the full extent of the loss yourself.

Deductible: This is the total money you are required to pay from out-of-pocket expenses before your insurance covers the remaining expenses. For example, if the deductible in your contract stipulates $2,000 and you incurred a total insured loss of $16,000, your insurance company is required to pay $14,000 while you pay $2,000. The greater the deductible, the lesser the premium, and vice versa.

It is important to state that not all insurance plan functions as an indemnity contract. Contracts such as most personal accident insurance contracts and life insurance contracts are stipulated as non-indemnity contracts because life cannot be quantified using money.

Insurable interest

 You have every the legal right to insure any property or any incident that may cause loss of money or legal liability for you in the future.

assume you are living in your uncle's house, and you apply for homeowner's insurance because you believe that you are likely to inherit the house later. Your request will be declined by the insurance company because you are not the owner of the house and, therefore, you do not stand to suffer financially in the event of a loss. In insurance, it is not actually the car, machinery or house that is insured. Instead, it is the financial interest in that house, car, or machinery to which your policy is applicable. This is regarded as insurable interest.

Principle of Subrogation

With this principle, the insurer is free to sue a third party for losses caused and is free to pursue all legal methods towards getting back part of the money paid to the insured as a consequence of the loss.

For example, if you get injured in a road accident due to reckless driving by another party, you are due for compensation by your insurer. However, your insurance company might decide to sue the reckless driver in bid to recover that money spent.

The doctrine of good faith

When deciding to go for any insurance plan, it is important that you provide relevant facts and detailed information about yourself truthfully to the insurer. Every insurance contract is based upon the doctrine of total good faith or the concept of Uberrima fides. It upholds the presence of mutual good faith between the insured and the insurance provider.

The Duty of disclosure: It is very essential that you provide all the relevant  details that might influence the decision of the insurance provider in entering a contract with you. There are certain material information that you are legally mandated to provide for your insurance provider to make a concrete decision whether to insure you or not.

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