Insurance policy

In insurance, the insurance policy is a contract (generally a standard form contract) between the insurer and the insured, known as the policyholder, which determines the claims which the insurer is legally required to pay. In exchange for an initial payment, known as the premium, the insurer promises to pay for loss caused by perils covered under the policy language.

Insurance contracts are designed to meet specific needs and thus have many features not found in many other types of contracts. Since insurance policies are standard forms, they feature boilerplate language which is similar across a wide variety of different types of insurance policies.

The insurance policy is generally an integrated contract, meaning that it includes all forms associated with the agreement between the insured and insurer.^[1]:10 In some cases, however, supplementary writings such as letters sent after the final agreement can make the insurance policy a non-integrated contract.^[1]:11 One insurance textbook states that generally "courts consider all prior negotiations or agreements ... every contractual term in the policy at the time of delivery, as well as those written afterwards as policy riders and endorsements ... with both parties' consent, are part of written policy".^[2] The textbook also states that the policy must refer to all papers which are part of the policy.^[2] Oral agreements are subject to the parol evidence rule, and may not be considered part of the policy if the contract appears to be whole. Advertising materials and circulars are typically not part of a policy.^[2] Oral contracts pending the issuance of a written policy can occur.^[2]

General features

The insurance contract or agreement is a contract whereby the insurer will pay the insured (the person whom benefits would be paid to, or on behalf of), if certain defined events occur. Subject to the "fortuity principle", the event must be uncertain. The uncertainty can be either as to when the event will happen (e.g. in a life insurance policy, the time of the insured's death is uncertain) or as to if it will happen at all (e.g. in a fire insurance policy, whether or not a fire will occur at all).

• Insurance contracts are generally considered contracts of adhesion because the insurer draws up the contract and the insured has little or no ability to make material changes to it. This is interpreted to mean that the insurer bears the burden if there is any ambiguity in any terms of the contract. Insurance policies are sold without the policyholder even seeing a copy of the contract.^[1]:27 In 1970 Robert Keeton suggested that many courts were actually applying 'reasonable expectations' rather than interpreting ambiguities, which he called the 'reasonable expectations doctrine'. This doctrine has been controversial, with some courts adopting it and others explicitly rejecting it.^[3] In several jurisdictions, including California, Wyoming, and Pennsylvania, the insured is bound by clear and conspicuous terms in the contract even if the evidence suggests that the insured did not read or understand them.^[4][5][6]
• Insurance contracts are aleatory in that the amounts exchanged by the insured and insurer are unequal and depend upon uncertain future events. In contrast, ordinary non-insurance contracts are commutative in that the amounts (or values) exchanged are usually intended by the parties to be roughly equal. This distinction is particularly important in the context of exotic products like finite risk insurance which contain "commutation" provisions.
• Insurance contracts are unilateral, meaning that only the insurer makes legally enforceable promises in the contract. The insured is not required to pay the premiums, but the insurer is required to pay the benefits under the contract if the insured has paid the premiums and met certain other basic provisions.
• Insurance contracts are governed by the principle of utmost good faith (uberrima fides) which requires both parties of the insurance contract to deal in good faith and in particular it imparts on the insured a duty to disclose all material facts which relate to the risk to be covered. This contrasts with the legal doctrine that covers most other types of contracts, caveat emptor (let the buyer beware). In the United States, the insured can sue an insurer in tort for acting in bad faith.

Structure

Early insurance contracts tended to be written on the basis of every single type of risk (where risks were defined extremely narrowly), and a separate premium was calculated and charged for each. This system of "specific risk" or "named perils" coverage proved to be unsustainable in the context of the Second Industrial Revolution, in that a typical large conglomerate might have dozens of types of risks to insure against. For example, in 1926, an insurance industry spokesman noted that a bakery would have to buy a separate policy for each of the following risks: manufacturing operations, elevators, teamsters, product liability, contractual liability (for a spur track connecting the bakery to a nearby railroad), premises liability (for a retail store), and owners' protective liability (for negligence of contractors hired to make any building modifications).^[7]

In 1941, the insurance industry began to shift to the current system where covered risks are initially defined broadly in an "all risk" or "all sums" insuring agreement on a general policy form (e.g., "We will pay all sums that the insured becomes legally obligated to pay as damages..."), then narrowed down by subsequent exclusion clauses (e.g., "This insurance does not apply to...").^[8] If the insured desires coverage for a risk taken out by an exclusion on the standard form, the insured can sometimes pay an additional premium for an endorsement to the policy that overrides the exclusion.

Insurers have been criticized in some quarters for the development of complex policies with layers of interactions between coverage clauses, conditions, exclusions, and exceptions to exclusions. In a case interpreting one ancestor of the modern "products-completed operations hazard" clause, the Supreme Court of California complained:

“

The instant case presents yet another illustration of the dangers of the present complex structuring of insurance policies. Unfortunately the insurance industry has become addicted to the practice of building into policies one condition or exception upon another in the shape of a linguistic Tower of Babel. We join other courts in decrying a trend which both plunges the insured into a state of uncertainty and burdens the judiciary with the task of resolving it. We reiterate our plea for clarity and simplicity in policies that fulfill so important a public service.[9]

”

Parts of an insurance contract

• Declarations - identifies who is an insured, the insured's address, the insuring company, what risks or property are covered, the policy limits (amount of insurance), any applicable deductibles, the policy period and premium amount. These are usually provided on a form that is filled out by the insurer based on the insured's application and attached on top of or inserted within the first few pages of the standard policy form.
• Definitions - define important terms used in the policy language.
• Insuring agreement - describes the covered perils, or risks assumed, or nature of coverage, or makes some reference to the contractual agreement between insurer and insured. It summarizes the major promises of the insurance company, as well as stating what is covered.
• Exclusions - take coverage away from the Insuring Agreement by describing property, perils, hazards or losses arising from specific causes which are not covered by the policy.
• Conditions - provisions, rules of conduct, duties and obligations required for coverage. If policy conditions are not met, the insurer can deny the claim.
• Endorsements - additional forms attached to the policy form that modify it in some way, either unconditionally or upon the existence of some condition. Endorsements can make policies difficult to read for nonlawyers; they may modify or delete clauses located several pages earlier in the standard insuring agreement, or even modify each other. Because it is very risky to allow nonlawyer underwriters to directly rewrite core policy language with word processors, insurers usually direct underwriters to modify standard forms by attaching endorsements preapproved by counsel for various common modifications.
• Policy riders - A policy rider is used to convey the terms of a policy amendment and the amendment thereby becomes part of the policy. Riders are dated and numbered so that both insurer and policyholder can determine provisions and the benefit level. Common riders to group medical plans involve name changes, change to eligible classes of employees, change in level of benefits, or the addition of a managed care arrangement such as an Health Maintenance Organization or Preferred Provider Organization (PPO).^[10]
• Policy jackets - The term "jacket" has several distinct and confusing meanings. In general, it refers to some set of standard boilerplate provisions which accompanies all policies at the time of delivery. Some insurers refer to a package of standard documents shared across an entire family of policies as a "jacket." Some insurers extend this to include the standard policy form itself (i.e., everything which is preprinted and then attached without modification), so that the only parts of the policy not part of the jacket are the endorsements and declarations. Other insurers use the term "jacket" in a manner closer to its ordinary meaning: a binder, envelope, or presentation folder with pockets in which the policy may be delivered, or a cover sheet to which the policy forms are stapled or which is stapled on top of the policy. The standard boilerplate provisions are then printed on the jacket itself.

Industry standard forms

In the United States, property and casualty insurers typically use similar or even identical language in their standard insurance policies, which are drafted by advisory organizations such as the Insurance Services Office and the American Association of Insurance Services.^[11] This reduces the regulatory burden for insurers as policy forms must be approved by states; it also allows consumers to more readily compare policies, albeit at the expense of consumer choice.^[11] In addition, as policy forms are reviewed by courts, the interpretations become more predictable as courts elaborate upon the interpretation of the same clauses in the same policy forms, rather than different policies from different insurers.^[12]

In recent years, however, insurers have increasingly modified the standard forms in company-specific ways or declined to adopt changes^[13] to standard forms. For example, a review of home insurance policies found substantial differences in various provisions.^[14] In some areas such as directors and officers liability insurance^[15] and personal umbrella insurance^[16] there is little industry-wide standardization.

Manuscript policies and endorsements

For the vast majority of insurance policies, the only page that is heavily custom-written to the insured's needs is the declarations page. All other pages are standard forms that refer back to terms defined in the declarations as needed.

However, certain types of insurance, such as media insurance, are written as manuscript policies, which are either custom-drafted from scratch or written from a mix of standard and nonstandard forms.^[17] By analogy, policy endorsements which are not written on standard forms or whose language is custom-written to fit the insured's particular circumstances are known as manuscript endorsements.

References

1. Wollner KS. (1999). How to Draft and Interpret Insurance Policies. Casualty Risk Publishing LLC.
2. Porter K. (2007). The Legal Environment of Insurance, §5.17. AICPCU.
3. Rahdert MC. (1998). Reasonable Expectations Revisited. Conn. Ins. Law Journal.
4. Hadland v. NN Investors Life Ins. Co., 24 Cal. App. 4th 1578 (1994).
5. St. Paul Fire & Marine Insurance Co. v. Albany County School District No. 1, 763 P.2d 1255 (Wyo. 1988).
6. Standard Venetian Blind Co. v. American Empire Ins. Co., 503 Pa. 300, 469 A.2d 563 (1983).
7. Anderson, Eugene R.; Stanzler, Jordan S.; Masters, Lorelie S. (2013). Insurance Coverage Litigation (2nd ed. ed.). New York: Wolters Kluwer. p. 1-31. ISBN 9780735511736. Retrieved 10 April 2016.
8. Stempel, Jeffrey W. (2007). Stempel on Insurance Contracts (3rd ed.). New York: Aspen Publishers. pp. 2–113—2–116. ISBN 0735554366.
9. Insurance Co. of North America v. Electronic Purification Co., 67 Cal. 2d 679, 691-692 (1967).
10. "Pricing Medical Expense Insurance," in Medical Expense Insurance, (Washington: The Health Insurance Association of America, 1997), 89.
11. Impact of the Abolition of McCarran-Ferguson Antitrust Exemption for the “Business of Insurance”. CRS.
12. Boardman M. (2006). Contra Proferentem: The Allure of Ambiguous Boilerplate. Michigan Law Review.
13. Policy Issues: ISO Program Revisions. PropertyCasualty360.
14. Schwarzc D. (2011). Reevaluating Standardized Insurance Policies. The University of Chicago Law Review. See also: Not All Homeowners’ Policies Are Alike. New York Times.
15. E&O Insights: Directors & Officers Liability Is Not Your Normal Insurance Product. Insurance Journal.
16. Time To Standardize Personal Umbrella Insurance Policies. IRMI.
17. Dart Industries, Inc. v. Commercial Union Insurance Co., 28 Cal.4th 1059 (2002).