An insurance contract or policy is a legal binding agreement between the policyholder and the insurer where both parties are obligated to fulfil specific roles and responsibilities. A broker/intermediary is not a party to the agreement, but they have the duty of providing advice regarding the product and suitability of cover to cater for the unique business needs of the insured.
The policy agreement consists of the policy schedule, wording, proposal forms and any representations of information made in writing or during a telephone recording. All these parts are considered when interpreting the policy.
The policyholder must disclose any material fact (a material fact is “a piece of information that is vital to evaluating and interpreting a subject matter in legal documents”) and information truthfully that may impact the risk accepted in the agreement issued, changes made, and claims circumstances. Every policy document also contains a disclaimer requesting the policyholder to confirm that the information provided to the insurer is technically correct and up to date.
The BOTTOM line is that insurance works on mutual trust.
Premium calculations
An insurance company will quote the policyholder for the risk they take on. An insurer will accept the risk if they are satisfied that the risk falls within their risk appetite.
The premium is the future premium a policyholder must pay the insurance company. The premium due must be paid up to date to enable the insurer to pay a claim. Policyholders with a poor premium payment record will build up a bad reputation and be declined altogether in future requests.
When premium obligations cannot be met for some reason, it is essential to make arrangements in writing with the insurer.
As each business is unique, premiums will vary depending on the nature, size, type, location, the loss history, the risks exposed to, the product purchased, and the extent of cover granted. Limited cover will attract a cheaper premium as the exposure of the insurer will be reduced.
If a business owner invested in risk management and mitigation tools, an insurer is more likely to discount the premium payable. Remember, insurers are risk conscious. They love clients who are too!
What does it take to be a policyholder?
The insured must be legally competent and have an insurable interest in the assets and liabilities covered by an insurance policy. When a claim is submitted, an insurer may ask for proof of ownership.
For an insurance policy to respond in the event of a claim, it is crucial to adhere to all regulations and laws within the territorial limits of cover granted. Breaking any law or regulations may cause insurers to treat a policy as if it never existed.
Basis of settlement or valuation
The basis of settlement or basis of valuation represents the terms under which claims are paid.
Avoid under-insurance at all costs. Disclose the values sufficient to replace items insured as insurers may apply average. Average means the policyholder will be held responsible for a portion of the loss. In addition, insurers will penalise the insured by calculating the claim submitted in proportion to the level of the under-insurance.
Example
Claim R10 000
Insured for R50 000
Replacement Value R100 000
Underinsurance calculation (R10 000 x R50 000) divided by R100 000 = R5 000
The maximum amount you can claim
A policy will refer to a sum insured or limit of indemnity. A sum insured represents the monetary value measurable in terms of money for a physical, tangible asset or item. Limit of indemnity refers to liability or insurances where a monetary amount cannot attach, such as compensation.
The purpose of insurance
Insurance aims to put the policyholder in the same position before loss or damage suffered. The policyholder cannot profit from insurance. Therefore contractually, the insurer can choose whether they repair, restore, or replace claimed items.
If a claim is not sudden or unforeseen, a short-term commercial insurance policy cannot respond.
Excess/deductible/first amount payable
In the agreement with the insurer, the policyholder is responsible for paying an excess, otherwise known as a first amount payable or deductible when claiming.
People underestimate the value of their excess as it is often expressed and perceived as a small percentage. However, when the excess gets deducted from a significant sum insured/limit of indemnity, it can catch business owners by surprise. In addition, it hurts their pockets substantially, as, in traditional accounting, no provision is made for it but rather treated as a reactive unbudgeted line item.
Some excesses stack upon each other by the application of additional or penalty excesses.
Subrogation
Subrogation means the insurer takes over the rights of the policyholder after a claim is settled. This takeover of rights means that insurers can attempt to recover any amount from third parties. It will help reduce the loss ratio attaching to the policy, which will also assist in minimising corrective action taken by underwriters.
Representations or disclosure
The policyholder’s representation or disclosure means any information sent to insurers via a proposal form, written correspondence, or recorded conversation. Breach of representations or non-disclosure occurs when false information is submitted, or essential information is withheld that may be material to the risk, agreement, or claim submitted.
Warranties
Insurers may impose warranties in insurance agreements to ensure that the risk remains the same or similar throughout the policy. The insured makes an undertaking of contractual responsibility and must uphold the conditions of the warranty. Breach of a warranty is considered a breach of the agreement.
Endorsements
All changes and specific conditions added to the policy is version controlled and recorded by the insurer.
Co-insurance
This refers to the sharing of insurance by two or more insurance companies in agreed proportion to cover a risk.
Suppose a policyholder claims and the insurer discovers that cover has been taken out with other insurers for the same events. In that case, the insurer will only be liable for a portion of the amount payable.
Reinsurance
It occurs when the insurer “sells” some of your coverage to another insurance company.
Exclusions
Circumstances not covered as part of the policy agreement. The insurer will have general exclusions applying to the entire policy or section and specific exclusions that may only apply to specific policy parts.
Extensions
Additional cover or perils added to a policy that does not form part of the original agreement provided it is indicated on the schedule, to be included automatically or by selecting the policyholder forms, which form part of the cover provided at an additional premium. Extensions are a mechanism for insurers to offer more extensive coverage to the insured.
