Welcome to Chapter 2
In this section, you will examine some important concepts that are pertinent to insurance contract law and policy provisions. First, you will learn about special characteristics of an insurance contract, and the required elements that must be included in each. Next, you will focus on legal concepts and definitions that apply to all insurance policies.
By the end of this chapter, you will be able to explain the purpose of each contract element and provision.
Exam Alert!
This chapter's concepts are the foundation for understanding how policies work. Questions about policy structure, endorsements, liberalization clauses, and the definition of insureds appear frequently on the exam.
What You'll Learn
Policy Structure
- - Declarations page
- - Definitions section
- - Insuring agreement
- - Conditions, endorsements
- - Exclusions and limits
Definition of the Insured
- - Insured vs Named Insured
- - First Named Insured
- - Additional Insureds
- - Real-world examples
Duties After a Loss
- - Protect property
- - Prepare inventory
- - Cooperate with insurer
- - Notify police (theft)
- - Proof of loss
Provisions and Clauses
- - Arbitration
- - Other Insurance
- - Notice of Claim
- - Loss Settlement
- - Cancellation/Nonrenewal
Claims Made Policy Form
- - Claims Made vs Occurrence
- - Coverage triggers
- - CGL policies
- - Long-tail liability
Fair Credit Reporting Act
- - FCRA overview
- - Consumer rights
- - Insurer obligations
- - Adverse action notices
Chapter Recap
- - Complete concept summary
- - Policy structure overview
- - Key terms reference
- - Exam focus areas
Key Terms to Know
Before diving into the details, familiarize yourself with these foundational terms that appear throughout this chapter:
Appraisal
A professional assessment to determine the extent of damage and value of property.
Example: After a hailstorm damages your roof, an insurance appraiser inspects it and determines $12,000 in repairs are needed.
Earned Premium
The portion of premium paid in advance that belongs to the insurer for the elapsed time of the policy.
Example: You pay $1,200 for a 12-month policy. After 3 months, the insurer has "earned" $300 (3/12 of the premium) for coverage already provided.
Liberalization
The removal or loosening of restrictions in an insurance policy, automatically applied if changes broaden coverage without extra premium.
Example: Your insurer updates their standard homeowners policy to cover a new type of water damage. Your existing policy automatically gets this broader coverage without you paying extra.
Negligence
Failure to use the care that a reasonable, prudent person would use in similar circumstances.
Example: A store owner fails to put up a "Wet Floor" sign after mopping. A customer slips, falls, and breaks their arm. The owner was negligent because a reasonable person would have posted warning signs.
Policyowner
The person entitled to exercise the rights and privileges provided in the insurance policy.
Example: Sarah owns an auto insurance policy. As the policyowner, she has the right to cancel it, add drivers, or change coverage limits.
Third Party
An individual or entity other than the insured and the insurer.
Example: You rear-end another driver. You (first party) have insurance with State Farm (second party). The other driver is the third party - someone outside your insurance contract but affected by your actions.
Underwriting
The risk selection process of reviewing applications to determine eligibility for insurance coverage.
Example: You apply for homeowners insurance. An underwriter reviews your application, checks if the home is in a flood zone, looks at your claims history, and decides whether to approve you and at what premium rate.
Chapter 2 Quick Reference
Appraisal
Professional damage assessment
Earned Premium
Premium for elapsed time
Liberalization
Auto-broadening of coverage
Negligence
Failure to use reasonable care
Policyowner
Exercises policy rights
Third Party
Neither insured nor insurer
Underwriting
Risk selection process