Understanding Your Insurance Policy

by : Jim Pretin

You probably have insurance, such as home, auto, or health insurance. Even though you pay a small fortune in premiums, you probably know next to nothing about the insurance contract itself. By insurance contract, I am referring to that mass of pages that are attached to the first few pages of your policy. There are some basic definitions, as well as certain terms and conditions, of which you should be aware.

The main purpose of an insurance policy is to indemnify, or reimburse, you for a loss that can be measured in terms of money. So, if you look within your insurance contract, you will likely see the words indemnify or indemnity peppered throughout the document. The basic principle of indemnity is that the insurance company will not pay you any more than the amount of the loss suffered. If your house burns to the ground, and you were covered for $500,000 for the dwelling, the company is not going to pay you $1,000,000 so you can go get a bigger house.

Another basic principle of your policy is that it has a legal purpose. In other words, the policy does not encourage you to engage in illegal activities. If it does, the contract is not valid. The purpose of your insurance is to protect you from damages suffered to your home, car, or health, etc.

In addition, your policy should contain a clause regarding legal capacity. If you are a minor, or incompetent, then the contract could be deemed null and void when it comes time to file a claim. This clause protects the insurance company in the event that the person they have insured under the contract has misrepresented their age or mental status. Most insurance applications contain questions about age and/or mental conditions, and if answered truthfully, the insurance company will deny coverage before issuing the policy. However, in some cases, the applicant lies when answering these questions. The legal capacity clause protects the company from having to indemnify the person in the event that he or she lied to them during the application process.

Another important part of the contract is the consideration. For insurance purposes, consideration refers to the monetary obligations of each party. The customer has to pay the premium for the policy to remain active, and in return, the insurance company has to pay the damages resulting from a claim if one should arise.

Also, the person(s) applying for insurance must have an insurable interest in whatever is being insured, whether it is a home, car, or the life of a person (as with life insurance). Insurable interest usually refers to ownership. A person must be the owner of the car or home to insure it. With life insurance, if the owner of the policy is not the same as the person whose life is to be insured, the owner must have an insurable interest (as in a financial interest) in that person and must be formally connected to the person in some manner, either as a relative, spouse, or significant other.

You should also be cognizant of the fact that insurance contracts usually contain a subrogation clause. This gives the insurance company the power to file suit against a third party if that other party was the cause of the claim. For example, if you hit a pedestrian with your car, the insurance company for the pedestrian retains the right to sue you to reimburse them for any expenses incurred by the injured party as a result of the accident.

I hope this has helped you to form an understanding of your insurance contract. Even though almost everyone has insurance, most people are not aware of some of the most important facets. You should skim through the huge packet of terms and conditions that are attached to your policy and then call your agent or broker with any questions or concerns you might have.