What Are The Main Parts Of An Insurance Policy?

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Last updated on: March 9, 2020
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First – Insurance Basics

Insurance policies serve a valuable purpose. A policy protects a person’s financial well-being by covering the insured person against losses. Generally, upon signing an insurance policy, the customer and insurance company reach an agreement. The the insurance company agrees to accept the financial responsibility for specific risks and losses involving the insured.

Auto liability coverage shows us how it works. A major type of auto insurance includes liability coverage. With liability coverage, when a driver is at fault for an accident, the insurance company pays for damages up to the policy’s limits. If the limit is $300,000, the insurance company covers the insured up to that financial point.

The basic concept of insurance coverage remains the same with renters insurance, homeowners insurance, and flood insurance. It also exists for other types of insurance that cover everything from food trucks to personal trainers. As long as the person insured follows the terms and conditions associated with a policy, coverage should remain in place.

Know Your Policy

Read and Ask Questions if Needed

An individual may purchase insurance online or over the telephone, but never take the time to read their insurance contracts. Anyone who relies on an insurance company’s protection should be sure to learn how their policy works. Understanding the different parts of an insurance policy can help make the coverage clear to the policy owner. If you aren’t clear about what the policy says ask questions before you sign on the dotted line.

Understand Your Policy 

The more an insured individual understands a policy, the better he/she will know if a specific contract is right for their needs. Different insurance policies contain many of the same elements. Four essential parts comprise the bulk of an insurance policy. The following details about the four parts of an insurance policy can help policyholders understand how insurance contracts work.

Declarations Page

What coverage does your policy offer? 

A lengthy contract that covers all of the information in great detail and a summary of coverage presented in the policy. The summary is known as the Declaration Page. It provides the highlights of the coverage in the policy including the type of coverage and the policy limits. Simply put, the pages declare what you purchased with the policy.

Not every auto insurance policy comes with comprehensive coverage and collision coverage. State laws do not mandate these two coverage options, but leasing company or auto loan company might impose them on customers. If you purchase one or both of these coverage options, they will appear on your Declaration Page.

What’s the Price? Are there fees?  

The pricing associated with the detailed coverage also appears on the Declaration Page. Each element of coverage features a corresponding price. So, comprehensive coverage may list as $134, while collision coverage could list at $138.

Please note that fees charged to policy customers vary from individual to individual. Each policy holder’s background is different. A homeowner with multiple previous claims pays more than a person who has never filed a claim. An auto insurance customer with no moving violations commonly pays less than someone who has received two speeding tickets over the prior year. Other factors that affect the policy price include:

  • Credit History
  • Length of Time with the Insurance Company
  • Breaks in Insurance Coverage

Other factors, such as a discount for veterans may further drive down the cost of a policy. If you have questions about coverage options and specific fees, ask an insurance agent or insurance company representative for answers.

Understand Coverage Limits & Deductibles  

The Declarations Page also includes information about coverage limits and deductibles. A deductible refers to how much money the insured must pay before policy coverage begins. If a wind damage policy deductible is written as $4,000 it means if a hurricane caused home damage of $12,000, the insured must pay $4,000 out of pocket and the insurance company would cover the remaining $8,000.

An option does exist for those who aren’t comfortable with coverage limits. If the maximum amount of coverage is $500,000, damages beyond that number would not be paid by the insurance company. However, another policy known as an umbrella policy could cover the losses beyond the initial policy’s coverage limits. Of course, umbrella policies also come with set coverage limits. The higher the coverage limit, the higher the cost of the insurance policy becomes.

If an Item Doesn’t Appear on the Declarations Page, Then Coverage Doesn’t Exist in the Policy 

You won’t be able to file an uninsured motorist claim if that coverage isn’t posted on your Declarations Page. If you see the coverage you want is missing, then you must take additional steps to buy it. Your Agent can provide you with a quote for the additional coverage and is usually able to quickly add it on to your policy.

Policy Forms

Reading the Declarations Page won’t provide you with a definite understanding of the coverage. The Policy Forms contain all of the detailed aspects of the contract. The term forms may be a bit misleading. Some people assume the term refers to blank application forms. (Policy forms may also be referred to as Policy Language.) Multiple elements appear within the language of the policy forms. Coverages and exclusions would be the two most prominent elements within the policy.

Ask, “Who is covered?”  

Don’t overlook the details on the Declarations Page that include who receives coverage in the policy. Anyone who is not a named as insured won’t receive any coverage.

Ask, “Are the individuals eligible?”

Individuals can be added to the policy, but all parties must be considered by the insurance company to be eligible. Putting an ineligible person on a policy happens, however, the insurance company will not pay a claim once they find out. In some cases, the insurance company could even file fraud charges.

Policyholders should not make any assumptions about what their coverage includes or who is covered. After all, the policy language explicitly mentions who is covered and how much the policy pays.

Covered events refers to something along the lines of fire damage to a home. The policy may include coverage to a garage not connected to the house but where the garage is on the property.

Ask, “Is there an Exclusion?”

An Exclusion is anything that’s not covered by the policy. A homeowner’s contract may extend liability coverage to pets, but certain breeds face exclusions. If a pit bull is not included, then the owner would be responsible for any liabilities incurred by a pit bull. A pet owner may also find that he/she can’t file a claim when a dog or cat they own has a previous history of biting.

Be sure to read through all of the conditions on the policy forms pages. The language represents the core aspects of policy coverages. The language presented in them is legally binding. Little is left to interpretation when a challenge is made in court over a denied claim.


Ask, “What is an Endorsement?”

Regardless of the length the policy, forms might build upon the original contract. Anything added or deleted from the agreement appears in the Endorsements. Also called a rider, an Endorsement extends the legal language and terms of the contract.

Endorsement Example

A common example of an Endorsement found in an auto insurance policy is a food delivery rider. A standard auto insurance policy excludes commercial activity. So, if you began using your auto for food delivery and got into an accident while performing a delivery, insurance wouldn’t cover you. Paying thousands of dollars a year for a commercial auto policy wouldn’t make sense if you were only delivering food 10 hours a week. So, a food delivery rider covering a limited amount of mileage can be added to a standard policy for a fee.

When the insurance company adds an Endorsement, pay careful attention to the language.
An insurance company creates a rider to establish specific legally binding aspects of the contract. An Endorsement stating a homeowner’s policy won’t cover burst pipes or extend liability coverage to any demolition work means what it says. Therefore, policyholders must take additional precautions.

Policyholders who ignore Endorsements are ignoring the terms and conditions of a policy.
Often, people don’t read them because they renew their contracts year after year with the same company. They don’t re-read the agreement, so they don’t look over the Endorsements added to the policy.

The terms on an Endorsement may vary and often come into effect with the contract’s start date and ends when the contract expires. The Endorsement, however, might appear when a policy’s renewal paperwork arrives.

That said, an Endorsement could be limited for a set timeframe for only a portion of the term. The previous example of excluded burst pipe coverage may only be in effect from December 1 to March 15. Necessarily, this would eliminate frozen pipes during the wintertime.


Ask, “Are There Exclusions?”

Exclusions aren’t merely woven into an insurance policy contract here and there or mentioned in passing. The insurance provider must spell out all Exclusions in great detail. Doing so cuts down on confusion regarding what the policyholder can’t file a claim on.

Here’s an Exclusion Example

An example of an Exclusion in home insurance policies is watercraft/boat insurance. The policy spells out that any claims or liabilities arising from a watercraft require a different insurance policy. Be sure you understand what is not covered under a policy. That is helpful because it directs the policyholder towards purchasing another policy, if needed. If one type of policy doesn’t provide coverage, seek one that does. Be careful not to make assumptions about coverage as it could lead to the denial of the claim.

Please note that insurance companies do not have free reign to eliminate coverage as they see fit. The insurance industry falls under federal and state regulations. To be in the market, the insurance company must provide specific required coverages. That way, a level of fairness exists when it comes to the subject of exclusions.

Remember, an insurance company can refuse a particular client. With a homeowners policy, if the roof stands in extremely poor condition, the insurance provider can choose not to cover someone after an on-site inspection. The insurance provider can opt out of dealing with someone that’s deemed too high of a risk. Other insurance companies cater to high-risk clients, although those customers would pay accordingly.

The Insurance Provider’s Obligation

An insurance company must stick to the promises within a policy. If the insurance company refuses to pay out on a covered loss, the policyholder retains the option to sue the provider. The insured, however, cannot violate the policy’s terms and conditions.

Sometimes, the insurance company may find a reason for a denial that is legally questionable. Then, the matter may be settled in court on a case-by-case basis.

Questions About a Policy

Making any assumptions about an insurance policy could prove disastrous when the time comes to file a claim. If you are unsure about any aspects of an insurance policy you should ask your Agent or an insurance company representative.

Sending your policy for review by an attorney might be necessary as well. While attorney fees might be costly, the costs could end up being far less than a denied claim.

To answer any questions that may arise when purchasing a policy, be sure to read the contract from the first page to the last. Read all four critical parts. The insurance company will send the entire multi-page policy to its customers. Please read your policy and take it seriously.  You bought the policy to protect your assets.

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