Commercial insurance policies usually fall into one of two broad categories: casualty or property. Casualty insurance covers the liability incurred for losses that are the result of the insured's negligence. Property insurance is designed to cover losses to tangible property that becomes damaged or destroyed by a covered perilProperty insurance policies are first-party contracts because payment is made directly to the first party (the policyholder), for damaged or destroyed property. There are only two parties to the contract: the policyholder and the insurance company.Conversely, a casualty, or liability, contract is considered a third-party contract because, although there are still only two parties to the contract, the policy pays damages to a claimant who, although not an actual party to the contract, is considered a third party beneficiary.Another party typically involved with insurance contracts is the agent or broker. Stock insurance companies like Travelers distribute insurance policies through the independent agency system. Agents and brokers are not parties to the insurance contract. Rather, they are distributors acting within a defined grant of authority given to them by the insurer. This authority, part of the agency/principal relationship, is called binding authority.A binder is a written or oral agreement, issued by the agent, that states that coverage is in force. For performing this service, the insurer pays the agent a commission. Commission is a direct income to the agent but is an expense to the insurer.Binding authority gives the agent the authority to act on behalf of the insurer to accept or decline applications for insurance based on specific underwriting criteria and up to specific limits. (You will learn more about underwriting and risk selection in the next course.)The agent and the insurer have a special business relationship that results from this binding authority. The insurance company incurs vicarious liability as soon as the binder is issued by the agent because the knowledge of the agent is automatically attributed to the insurer as part of the agency/principal relationship.The main role of a written contract is to define the expectations of each of the parties. Therefore, it is critical that the roles, expectations and duties of each party be in writing. The chances of successful defense against a legal action are greatly diminished without written proofOften, contracts are written on pre-printed forms to create standardization and a consistency of expectations. In insurance, pre-printed form contracts serve to establish and support some of the essential elements of insurance. Standard forms create consistency and homogeneity, allowing insurers to apply the law of large numbers much more effectively. Without standard forms, the huge variations in coverage might be too great to reliably group for statistical purposes.Insurance policies, because they are legal contracts, are based on the principle of indemnity. As you will recall from The World of Insurance, the principle of indemnity says that an insured will be returned to approximately the same whole position as before a covered loss and that no one will profit and gain from a loss. This principle is important because it prevents insureds from profiting from insurance and it reduces the moral hazard by removing that profit potential.A moral hazard is a non-physical characteristic that increases the possibility or severity of a loss. It is a condition that exists when someone tries to intentionally cause or exaggerate a covered loss. Arson for profit is a common exampleAll insurance policies contain provisions intended to clarify how the amount payable by the insurer will be determined once a loss has occurred. Casualty and property insurance use different methods for determining the value of a covered loss.In Property insurance, for example, the policy outlines how the value of the property will be determined, i.e., Actual Cash Value, Replacement cost, etc.In Business Interruption insurance, it is necessary to clarify the extent to which lost income or extra expense is reimbursed.In Liability insurance, the contract clarifies the extent of the insurer's obligations. This is normally done by stating a maximum limit of liability payable for a covered event.Subrogation is the process by which an insurance company seeks reimbursement from another company or person for a claim it has already paid. Insurance policies usually have a section which outlines the parameters under which the insured and insurer will operate. The subrogation condition allows the insurer the right, but not necessarily the duty, to recover the amount that another party was responsible for a lossLet's see how subrogation works.An insured bought a new car and, while driving it, suddenly lost control of the car, causing an accident with serious injuries to two passengers. There were no other cars or obstacles involved. The insurer paid the insureds directly for their injuries, up to the limits of the policy. During the investigation, the insurer learned that the car manufacturer was recalling that particular make and model due to a serious defect in the steering mechanism. Expert examination concluded that it was this manufacturing defect that was the direct cause of the accident.If the person involved was uninsured, s/he would have had to pay for the cost of the damages and investigation and then sue the car manufacturer to recoup these amounts. However, since the driver was insured, the insurer paid the claim and, under the subrogation condition of the policy, has been transferred the right to recover from the car manufacturer some or all of the money paid out in claims.There are five key elements to subrogation:u The party claiming the right of subrogation has first paid the debt.u The party claiming subrogation has a legal obligation to pay the debt.u The party claiming subrogation is only secondarily liable for the debt.u A third party other than the insured is primarily liable for the debt.u No injustice will be done by allowing the subrogation right to be exercisedIn the previous example, the insurer meets all of these qualifications because it has met its legal obligation to pay the debt, it is secondarily liable for that debt, a third party (the car manufacturer) was primarily responsible for the debt and no injustice will result when the right to subrogate is exercisedYou learned in The Legal Environment of Insurance that one of the characteristics of a valid contract is that the insured must have an insurable interest. Insurable interest is the kind of exposure to a loss that a person or organization must possess in order to have legally enforceable insurance coverage. Generally, if a relationship exposes an individual to financial loss and that relationship is not unduly remote, that person has an insurable interest.Types of Insurance PoliciesThere are several types of policies common to property and casualty insurance: Participating policies allow the policyholder to receive a dividend payment as a result of lower than normal insurer expenses, regardless of any losses on the policy. In non-participating policies, the policyholder doesn't receive a dividendIn an indemnity policy, the amount paid is based on the value of the item insured at the time of the loss. This amount is determined, using an objective and impartial method, after the loss has occurred.Valued policies are used for certain types of personal property where it would be difficult to determine the value of the property after it has been damaged, destroyed or lost. A special valuation clause is added to the policy where the insured and the insurer agree to a specific value before the loss occursFixed coverage is used on those things that do not move. Examples include a home or other buildings. A floater policy is used to offer insurance on something that is not kept in a fixed location. People commonly purchase a floater as an addition to the homeowners policy to cover jewelry, furs, electronics or other smaller items that are portableProperty insurance policies may be issued on either a reporting or non-reporting basis. In non-reporting policies, a flat premium is charged with no requirement to report to the insurer any changes in value. The typical auto and homeowner policies are good examples.Reporting policies are used when it is difficult to determine in advance what the limits of insurance should be. These are typically used by businesses who have fluctuations in inventory.For example, a car dealership has shipments of new cars arriving at different times so the value of his inventory can change dramatically from day to day. To cover the physical damage to all the cars, the dealer would normally pay a deposit premium and submit a report to the insurer on a regular basis stating his actual inventory. It takes disciplined business management to successfully work with reporting forms. The insured needs to be accurate in his reporting to make sure that coverage is consistently adequate.Most reporting policies have a Full Valuation Clause which stipulates that the insured will be paid based on the values actually reported. So, if the insured under reports his inventory in an attempt to keep his premiums low, he risks not having adequate coverage when a loss occurs. Reporting policies are more expensive to administer because of the resources needed to analyze premiums, reconcile values and conduct audits.A self-contained policy is one that is a single, complete policy, providing one type of coverage, that contains all the agreements between the insured and the insurer. A typical auto or homeowner policy is a good example of a self-contained policy. Because they cover only one type of insurance, they are often referred to as monoline policiesModular, or package, policies are a combination of two or more individual policies or coverages into a single policy. Package policies are popular for large commercial accounts because they provide a coordinated approach to the various coverages, minimizing the possibility of gaps or duplication. They also provide consistent terminology and provisions to make interpretation easier in the event of a loss.The modular approach also simplifies underwriting in that the same basic information such as insured name, location, etc., is analyzed only once. Multi-line discounts are likely to be more generous than with the monoline approach. And, adverse selection problems are greatly reduced by writing all the lines of insurance togetherMost policies and related documents are pre-printed using standardized general forms. However, sometimes these standard pre-printed forms do not meet the unique insurance needs of a particular insured. In this situation, the insurer will use a policy specially designed, or manuscripted, for that specific need. It may include final wording that is the result of negotiation between the insured, the insurer and the agent. This is most frequently seen on larger business accounts. It is rare to manuscript an entire policy, rather, it is usually reserved for amendatory endorsementsThe Declarations is normally the first page of the policy and it contains the information that the insured has "declared" on the insurance application along with the insurer's own declaration of what coverage the policy provides. Each commercial line of business has its own declarations, most of which contain schedules of covered and/or ratable exposures, lists of locations covered, type of operations covered, a listing of what is in the policy including endorsements and limits, and any applicable deductiblesThe Insuring Agreement contains the first real substance of the insurance policy. It indicates under what circumstances the insurer will make a payment or provide a service. Many policies contain more than one insuring agreement. For example, an auto policy will have an insuring agreement for liability coverage, another for physical damage coverage and another for medical payments coverage.Definitions are found in three different areas, depending on the policy. Most commercial policies have a preamble that contains definitions. There is also a Definitions section at the beginning of the policy which outlines key terms that shape coverage, i.e., named insured, covered auto, etc. Sometimes definitions are found within the policy text itself. These are generally done because that term applies only to that one specific portion of the policy.Each policy has a separate section that outlines those things that are excluded from coverage. This allows the insurer to eliminate coverage for insurable or undesirable loss exposures. For example, wear and tear, rust and corrosion are excluded from property policies.Exclusions also help the insurer manage moral hazard exposures. By excluding intentional or false acts, the temptation to create or exaggerate losses is reduced.Exclusions also help avoid duplicate coverage or coverage that is not needed by the typical consumer. They also help reduce coverages that require special treatment including rating, underwriting or loss control while keeping premiums reasonable.While the preamble defines the term "insured", it also directs the reader to Section II. Here, the individuals who can be considered an insured are clearly outlined. This is common to most commercial policiesThe Limits Of Insurance section outlines the scope of the policy including who and what will be paid in the event of a covered loss.Commercial casualty and property policies have conditions which are common to both types of policies but they are not printed within the policies themselves. Rather, they are incorporated into the policies using an endorsement. Click the text below to see the different conditionsWhen reading an insurance policy, it is critical to read the entire policy including any endorsements, conditions or other documents that accompany it. Typically, insurance policies contain a phrase such as "...to which this insurance applies". This is because insurance policies are constructed in such a way that broad coverage is offered in the Insuring Agreement and then modified through the use of exclusions, conditions, endorsements or special definitions. This phrase helps the reader identify the key points of the policyInsurance professionals analyze losses for several reasons. An Account Executive will look at a new account's loss history to determine how the prior losses will impact the coverage being requested. At renewal, s/he will review our internal loss runs to look for trends that may indicate that the account is unprofitable at the current rate. An Account Executive may also work closely with the Claim Representative to determine if coverage was in force at the time of a loss or if an unusual loss is excluded from the policyAnalyzing a policy after a loss has occurred requires a thorough understanding of how insurance policies are constructed and interpreted. When reviewing a loss, the insurance professional first reads the insuring agreement, exclusions and conditions to determine if coverage exists. Once coverage has been verified, s/he will then determine how much the insurance company will pay on that particular loss.Insurance professionals generally know which losses are covered by:a Having a thorough understanding of how insurance policies describe coverage for certain exposures;aIdentifying and evaluating insurance policy provisions, anda Developing a good understanding of the common exposures covered and excluded under the policywww.rickclineagency.com303-932-1700Travelers U post