Whether you’re purchasing, upgrading, or replacing an insurance policy, it pays to understand your contract

In today’s risky world, it sometimes seems like the average person needs 100 insurance policies. Between homeowners insurance, life insurance, medical insurance and auto insurance, it can be difficult to understand the important details and functions of each policy and how they could affect you and your family’s physical and financial health in the case of unplanned expenses, natural disasters, accidents, and medical emergencies.

Understanding the important parts your insurance contract isn’t as hard as it looks– and once you really understand what’s inside it, you’ll be better prepared to make smart decisions for you and your family.

Elements and important legal components of an insurance contract

Legally, there are a few things that need to happen for your insurance contract to be completely valid when you sign it. The first element of an insurance contract is called ‘offer and acceptance.’ Basically, after filling out a proposal form for an insurance company, a potential customer will send back the form with a check or other type of payment (the offer). If the company agrees to insure you, they have accepted the offer (acceptance). However, the insurance company may only agree to insure you after making some additions or changes to your policy.

Indemnity contracts, life insurance, under-insurance, and excess

Most types of insurance are indemnity contracts. This means that the insurance policy will only replace or refund the cost of the damage to whatever has been insured– and not more. For example, if a hurricane blows down your small, 2 bedroom house, the insurance policy won’t replace it with a mansion on the water (although that would be nice). The major type of insurance that is not indemnity-based is life insurance; considering that it’s impossible to truly place a particular value on someone’s life. The insured simply pays out a specific amount per month so that a beneficiary or beneficiaries will receive a certain dollar amount, such as $1 million dollars, upon their death.

For property like homes and cars, with a specific and well-known value, it’s important to make sure that they are fully insured. To save money, people sometimes purchase an insurance contract that covers less than the entire value of your property; i.e. purchasing an $8,000 insurance policy on a $12,000 vehicle. While this may save money in the short run, it’s usually not a good idea, considering that if you wreck your car, you could be forced to come up with the additional $4,000 from your own pocket.

On the other hand, many insurance policies also have something called excess— which means that the damage inflicted on a home, vehicle, or other insured property must reach a minimum dollar amount to be covered by the policy. For example, if your $12,000 vehicle has an excess of $4,000, and an accident leaves $3,500 of damage on it, you wouldn’t be able to collect any money from the policy.

Insurable interest and subrogation

According to the law you have the right to insure anything, including property or people, that could cause you a financial loss or create a legal liability for you. This is why spouses are allowed to take out insurance policies on each other– because if one spouse dies, it could cause serious financial hardship for the other. Likewise, you cannot insure people or property whose loss or damage will not affect your own financial state– i.e. taking out a life insurance policy on a complete stranger is almost never allowed.

Subrogation simply means that an insurance company has the right to seek legal damages from a third party that has caused financial losses to the insured. If someone vandalizes your home, and your insurance policy covers your losses, the insurance company has a right to sue the vandal in order to compensate for the loss. This is why it might not be a good idea to get insurance involved when friends and close family members cause accidents to your property. While you might end up with an insurance payout– your aunt, uncle, or child might end up in court defending themselves against an insurance company lawsuit.

Doctrine of utmost good faith

This is the concept that good faith exists between the insured and the insurance company. This basically means that both parties need to be as honest as possible throughout the entire insuring process. For example, taking out homeowners insurance on your home without letting your insurance company know that your roof and your home’s foundation are seriously damaged would be a violation of this principle– and could void all or part of your insurance contract. On the other hand, an insurance company concealing important information about your insurance contract would also be a violation of this principle– and could lead to constructive legal action against the insurance company.

Doctrine of adhesion

This simply means that most insurance contracts are ‘take it or leave it,’ meaning that the insured does not have an opportunity to bargain, haggle, or otherwise change or negotiate the terms of his or her insurance contract. Because of this potential imbalance of power between the insurance company and the customer, any ambiguous or unspecified parts of the contract will usually be decided in favor of the insured in a court of law.

Always check prices and ask friends, family, and trusted professionals about an insurance contract

Now that you know some of the basic legal jargon of insurance contracts, it’s important to remind you of some of the other basics. Before signing any important financial contract,insurance or otherwise, it’s important to be informed about what you’re getting. Ask friends and family about their insurance policies– what they didn’t understand, any mistakes they made, and anything they would do differently when it comes to insurance.

If, after speaking to friends, family, and insurance advisors about your contract you’re still confused, you may also want to consult with a trusted professional– such as a financial advisor, lawyer, or accountant. If you’re concerned with the honesty of the insurance provider,make sure it’s a professional who doesn’t stand to gain from you purchasing a policy.

At Avante Insurance, we know that the more you understand about insurance, the smarter decisions you’ll make– and the better able you’ll be to cope with life’s challenges. To learn more about how insurance can protect you and your family, contact Avante Insurance today for a free consultation.