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Marshall Wilson Reavis III: Insurance Concepts & Coverage


By definition insurance is “a method by which interested members of a society can band together and collect funds to pay losses suffered later by members of the group.”

What is Risk?

Another term that is commonly used in the insurance industry is Risk. A generally accepted definition of risk is “uncertainty as to loss.”

One important factor which involves insurance is that there must be a certainty of loss with a certainty of no gain.

Therefore, one may lose but one may never gain from the insurance industry’s product. This concept is what removes insurance from the area of gambling. In gambling there is both a chance of loss and a chance of gain.

What Makes a Risk Insurable?

It is generally accepted that there are four criteria or requirements which must be fulfilled in order that a risk can be considered to be insurable. It must be one of a large homogeneous group. Not subject to catastrophic loss. The loss must be a fortuitous (accidental) happening.

What are a Loss Exposure, Loss and Claim?

There are three related concepts that are important to the study of insurance. These are loss exposure, loss and claim.

What is a Cause of Loss?

A major term used in insurance is Cause of Loss (also called a Peril). Insurance coverage responds when a loss results from a cause of loss identified in an insurance contract.

What is a Hazard?

A Hazard is a condition which feeds a cause of loss (peril). There are four types of hazards which contribute to the loss caused by perils that are covered under an insurance policy. These are physical, moral, morale and legal hazards.

What is Indemnity?

Indemnity means that the insurance company will pay the insured the money value of the loss.

What is Insurable Interest?

Insurable interest exists if the party purchasing the policy would suffer economic loss if the person or item insured were to die or be damaged, destroyed, lost or cause damage to another person or object.

Who are the Parties to the Insurance Contract?

With a Property insurance policy the contract parties are the Insured and the Insurance Company. Under a Liability insurance contract, the parties are the Insured, the Insurance Company and the “Third-Party” Claimant. In Life insurance the parties are the Insured, the Owner, the Beneficiary and the Insurance Company.

Health insurance contract parties are the Insurance Company and the Insured participants.

Who are the Insurance Producers?

The marketing arm of the insurance company is the insurance producer.

  • Agents. — This is the traditional way of marketing all types of insurance.
  • Brokers. — The technical difference between a broker and an agent is that the broker represents the client (insured) while the agent represents the insurance company at the time the transaction is made.
  • Commercial producers. The commercial producer provides expertise in all major insurance related operations (loss control, claims, underwriting) and may serve as a consulting risk manager.
  • Direct writers. — This system of marketing insurance involves employees who are the sales force for an insurance organization. The method of compensation may be salary, commission or both. They can only sell their company’s product.
  • Exclusive representatives.
  • Surplus and Excess Lines producers.

Consider the Organization of an Insurance Company.

Three major functions: Underwriting, Marketing and Claims. A fourth functional area called Administration.

  • Underwriting. — An underwriting department selects from the applicants for insurance those who meet its underwriting requirements. Within an Underwriting department, others who may assist in the underwriting function are actuaries, loss control personnel, medical and research staff.
  • Marketing. To support the marketing efforts there are related tasks within an insurance company including advertising, public relations, publications, sales and technical training and new product development.
  • Claims. Others involved in the claim process are attorneys, appraisers, claim auditors, loss analysts and medical staff.
  • Administration. The insurance policy which is a form of contract.

The Insurance Contract.

Elements of a Contract. — There are four basic elements of a contract. Each of these four elements must be present in a contract or it is not legally binding. These are the offer and acceptance, consideration, legal object and competent parties.

Consideration. – For a contract to be binding there must be some form of consideration (something of value) given in exchange by the buyer to the seller.

Competent Parties.

Parts of an Insurance Contract. — There are five basic parts to an insurance policy. The first four are referred to as the “D – I – C – E” provisions. They are the following:

  • Declarations
  • Insuring agreement
  • Conditions. — Because an insurance policy is a legal contract, it is necessary to spell out the rights, duties and responsibilities of the parties involved.
  • Exclusions. — The exclusions limit the coverage granted by the insuring agreement to the scope intended by the insurance company for the particular policy form.
  • Endorsements.
  • Special Characteristics of Contracts.
  • Aleatory contracts. — When equal value is not paid by both parties to a contract it becomes an aleatory contract.
  • Contract of adhesion. — This is a contract prepared by one party which must be accepted “as is” by the other party.
  • Conditioned contract. — This is a contract that is subject to conditions precedent or in the future before it can be completed.

Courts have given meaning to the principle of utmost good faith through the doctrines of misrepresentation, warranty and concealment.


Types and Characteristics of Property.

Real property. — The two types of real property are unimproved land and improved land (structures attached).

While land both improved and unimproved has value the land itself is seldom insured. However, the right to ownership of land may be insured.

Dwellings. — Structures affixed to improved land. A dwelling is commonly considered a single-family residence on its own plot of land.

Personal Property. — All property other than real property is considered personal property and can be either tangible or intangible.

A bailment has three elements:

  • Transfer of personal property possession without transfer of title
  • Acceptance of possession by the bailee
  • Expressed or implied agreement of the bailee to return the property to the bailor or to a person designated by the bailor

“C – O – P – E” which stands for Construction (wood, brick, masonry, non-combustible), Occupancy (single, multi-tenant, manufacturing, retail), Protection (fire, theft, public, private), and Exposure (neighborhood, woods, water, other properties).

There are three standard property causes of loss or perils forms.

  • The “Causes of Loss — Basic Form”
  • The next level of property causes of loss is the “Causes of Loss — Broad Form”.
  • The third and most liberal is the “Causes of Loss — Special Form” which provides what used to be called the “all-risks” coverage.

Building and personal property insurance policies can be written on a replacement cost basis (RC), which provides “new for old” in the event of loss. Otherwise, these policies are issued on an actual cash value basis (ACV) that deducts depreciation from the loss payment.


The insurance approach used by most individuals and families to protect themselves from the financial consequences of loss to real and personal property is the Homeowners Program.

The policy consists of the following parts:

Declarations — Information on who, what, where and when.

Insuring Agreement — A broad general statement of coverage provided.

Definitions — Terms and provisions found in the policy

Section I — Property Coverages: Coverage A — Dwelling Coverage B — Other Structures Coverage C — Personal Property Coverage D — Loss of Use

Section II — Liability Coverages: Coverage E — Personal Liability Coverage F — Medical Payments to Others Conditions Exclusions Endorsements (if used)


Some residences are not eligible for the Homeowners Program because of their value, occupancy or an underwriting reason. Also, it may be that the owner does not want the full range of coverages of the Homeowners Program nor want to pay the higher premiums. Such properties can be insured under the Dwelling Program (DP).

The Dwelling forms are monoline policies. The coverage parts are: Coverage A — Dwelling, Coverage B — Other Structures, Coverage C — Personal Property, Coverage D — Fair Rental Value and Coverage E — Additional Living Expense.


Mobile homes, also called Manufacture Housing, are used in areas where smaller and less expensive housing is in demand such as rural, retirement and vacation areas. These units are considered as personal property because of their mobile nature.


The National Flood Insurance Program (NFIP) provides insurance coverage for eligible properties in designated communities.

Building and Personal Property Coverage Form (BPP).

The Building and Personal Property Coverage Form (BPP) provides property insurance for commercial buildings and their contents. It is part of the Commercial Package Policy (CPP) program and may also be written as a monoline policy.

Appraisal. — When either party disputes the value of the claim an appraisal can be requested. Each party selects an appraiser and those two select an umpire.

Business Income Insurance (BIC).

Business Income Insurance provides coverage for the reduction in net income which is the result of a loss to an insured’s building and personal property.

During a period of interruption three things can occur:

  • there will be continuing expenses
  • there will be non-continuing expenses  
  • there may be extra expenses


The Businessowners Policy (BOP) is a multi-peril package policy for small and medium size commercial properties. It is similar in scope to the personal lines Homeowners Program.


The purpose of Liability Insurance is to protect an insured from economic loss in the event the insured is negligent and held legally liable for causing injury to other parties or damage to the property of others.

Principles of Tort Law.

Liability insurance deals with Tort Law and the concept of Negligence. A “tort” is a wrongful act or omission that invades the legally protected right of another party. The at-fault party is called a tortfeasor.

The elements of a tort are:

  • a legally protected right,
  • the wrongful invasion of that right
  • damages as a proximate or direct result of that invasion

The following represent torts that cause injury to the person:

  • Assault
  • Battery
  • Invasion of Privacy
  • Defamation of Character
  • False Arrest

The following represent torts that cause injury to property:

  • Trespass
  • Conversion

An at-fault party can be held liable for negligence only if the injured party can prove all the following elements of negligence:

  • The at-fault party owed a legal duty to the plaintiff to use due care
  • The at-fault party breached the legal duty owed to the injured party
  • The injured party suffered actual damage
  • There was a proximate or close causal connection between the at-fault party’s negligent act and the resulting damage to the injured party

Framework of a liability policy.

Another coverage which is included in most liability policies is Medical Payments. A Limit of Liability is established for each type of coverage in the contract based upon the premium charged.


Liability Insurance Policies provide insurance for individuals and commercial organizations by utilizing insurance coverage for specific types of losses.


The Personal Auto Policy (PAP) provides coverage for loss exposures that arise out of the ownership, maintenance or use of an automobile. The Personal Auto Policy can also be endorsed to cover motorcycles, golf carts, snowmobiles and similar vehicles.

Structure of the PAP. — The policy is made up of a Declarations page, Agreement and Definitions page and the following parts: Part A — Liability Coverage, Part B — Medical Payments Coverage, Part C — Uninsured Motorists Coverage, Part D — Coverage for Damage to Your Auto, Part E — Duties After an Accident of Loss and Part F — General Provisions.

  • Part A — Liability coverage. — The insurance company agrees to pay for bodily injury or property damage for which the insured becomes legally responsible due to an automobile accident.
  • Part B — Medical Payments coverage. — This section provides for all reasonable and necessary medical, surgical, dental and funeral expenses faced by an insured resulting from bodily injury caused by accident and incurred within three years of the date of accident.
  • Part C — Uninsured Motorists and Underinsured Motorists Liability insurance (UM/UIM). — These coverages are designed to meet the financial problems incurred due to bodily injury suffered by the insured which was caused by the negligent act of an uninsured or underinsured motorist.
  • Part D — Damage to Your Auto. — This coverage includes the physical damage insurance Collision Loss and Other Than Collision.


The Commercial General Liability (CGL) policy is the basic liability insurance available to businesses and other organizations.

The general categories of liability loss exposures in the CGL form are Coverage A — Bodily Injury and Property Damage Liability and Coverage B — Personal and Advertising Injury Liability. In addition, the policy includes Coverage C — Medical Payments and several Supplementary Payments.

Who is an Insured? — The named insured can be an individual, partnership, joint venture, corporation, limited liability company or a trust. The named insured, if an individual, includes a spouse for business ventures. If a partnership or joint venture then the named partner and all other partners and their spouses are insureds for business activities. For a corporation all executives, officers, directors and stockholders are insureds but only while conducting business for the corporation.


Businesses can face liability from the use of owned, hired, and borrowed autos or an auto owned by an employee and used in the business.

The Business Auto Coverage form can include optional physical damage insurance and by endorsement uninsured and underinsured liability as well as medical payments can be added. The Business Auto Coverage Form (BACF) can be issued as part of a Commercial Package Policy (CPP) or as a monoline policy. The parts of the BACF are: Section I — Covered Autos, Section II — Liability Coverage, Section III — Physical Damage Coverage, Section IV — Business Auto Conditions and Section V — Definitions.

Garage Coverage Form.

Garage Coverage Form. This form is used to insure auto and trailer dealers who deal in sales and service.

Motor Carrier Coverage Form.

The Motor Carrier Coverage Form provides liability coverage for any person or organization that uses transportation by an auto in the operation of a commercial enterprise. The form is patterned after the Business Auto and Garage Coverage forms.


Professional Liability Insurance provides insurance coverage for liability loss exposures faced by professionals that is not available under the Commercial General Liability (CGL). Those who are in need of such insurance fall into two categories. The first is “Malpractice Insurance” which provides coverage for those professions that work with the human body.

The second is “Errors and Omissions Insurance” which provides coverage for those who make decisions which can affect individuals and businesses favorably if conducted properly and unfavorably if the insured errs or omit something to the detriment of a client. Common professions in this category are accountants, lawyers, engineers, stock brokers and insurance producers.

Management Liability Policies. — The advent of many new regulatory rules that apply to business has caused the development of professional liability policies that are less about the acts of individuals and more about wrongful acts of an organization and its management.



There are two basic loss exposures that can affect an employer with respect to workers injured on the job. The first is the statutory Workers Compensation exposure for injury or occupational disease “arising out of or in the course of employment.” The second is the Employers Liability exposure for those individuals that are exempt from workers compensation laws but for whose injury the employer may be liable.

Acts. The first workers compensation law that was declared constitutional was in Wisconsin in 1911.

Following the passage of the Workers Compensation Act in the various states the insurance industry developed an insurance policy which covered both the Workers Compensation and Employers Liability exposure.

Today the workers compensation policy is a monoline policy and it is not designed to be included within a Commercial Package Policy (CPP).

The standard policy form has a general section and six parts. These are Part One — Coverage for Workers Compensation, Part Two — Coverage for Employers Liability, Part Three — Other states insurance, Part Four — The duties of the insured in the event of loss, Part Five — Provisions related to the premium determination and Part Six — Policy conditions.

Workers Compensation Benefits.

The benefits available under the policy basically include all medical expenses, disability income (indemnity benefits), rehabilitation costs and death benefits.

Commercial Crime Coverage Part.

The Crime Coverage Part of the Commercial Package Policy (CPP) is made up of the following sections:

  • Commercial Crime Declaration
  • Crime General Provisions Form
  • Crime Coverage Form(s)
  • Any Necessary Endorsements

The Commercial Crime program uses Crime Coverage Forms with the CPP and Crime Policy Forms when issued as a monoline policy.

Commercial Crime Insuring Agreements.

There are seven self – contained Loss Sustained forms with each having its individual insuring agreement. The coverage provided by each of the seven Loss Sustained forms is as follows:

  • Employee Theft
  • Forgery or Alteration
  • Inside the Premises – Theft of Money and Securities.
  • Inside the Premises — Robbery or Safe Burglary of Other Property.
  • Outside the Premises.
  • Computer Fraud.
  • Funds Transfer Fraud.
  • Money Orders and Counterfeit Money.


Needs of a financial institution to cover its unique crime loss exposures are met by the financial institution bond. While it is an insurance policy it is referred to as a bond since it also covers employee dishonesty which has been referred to as a fidelity bond. Organizations needing such coverage include banks, savings and loan firms, credit unions, stock brokers, finance and insurance companies.


Suretyship is not insurance. It is a guaranty agreement involving three parties — the principal (obligor), the obligee and the surety (guarantor).


Equipment Breakdown coverage is an important commercial coverage but needs to be used in connection with Commercial Property Insurance and Commercial Liability Insurance in order to fully protect the insured in the event of a major explosion, mechanical or electrical breakdown.

There are ten insuring agreements. The three major ones are 1) property damage, 2) expediting expenses and 3) business income and/or extra expense. The remaining seven insuring agreements are available for insureds with specific business risk protection needs. They are 4) spoilage damage, 5) utility interruption, 6) newly acquired premises, 7) ordinance or law, 8) errors and omissions, 9) brands and labels and 10) contingent business income and extra expense.

Equipment Breakdown Form Conditions.

The conditions found in the equipment breakdown form are generally the same as in other property insurance policies. However there are three that are specific to the policy:

  • Suspension
  • Joint or Disputed Loss Agreement
  • Jurisdictional Inspections


The field of Marine insurance has historically been divided into Ocean Marine (Wet) and Inland Marine (Dry) insurance.

Ocean Marine Insurance.

Ocean Marine insurance is one of the more fascinating areas of the insurance business since it dates back to historical times.

Ocean Marine policy. — The policy provides for three major classes of coverages which are:

Hull Insurance — The physical damage coverage for damage to the vessel.

Cargo Insurance — Coverage is provided for goods which are carried by the vessel from port to port. The cargo may be owned by the ship owner or by the buyer or seller of the goods.

Protection and Indemnity Insurance — This is liability coverage for the ship owner and the operations of the vessel.

Inland Marine Insurance.

The need for Inland Marine insurance developed as commerce began to move goods inland from the sea.

The categories of property that can be insured under inland marine forms are stated in The Nation-wide Marine Definition. These are 1) imports, 2) exports and domestic shipments, 3) instrumentalities of transportation and communication, 4) personal property floaters and 5) commercial property floaters.

Coverage Under Inland Marine policies.

The classes of filed commercial inland marine policies include: 1) accounts receivable, 2) camera and musical instrument dealers, 3) film, 4) floor plan merchandise, 5) implement and equipment dealers, 6) jewelry dealers, 7) mail, 8) musical instruments, 9) photographic equipment, 10) physicians equipment, 11) signs, 12) theatrical property and 13) valuable papers and records.


Reinsurance is used by insurance companies to reduce the amount of loss exposure insured by moving some of it to a reinsurance company.

Umbrella Insurance.

An Umbrella insurance policy is available for both Personal and Commercial insurance programs. The Umbrella policy is designed to “sit on top” of required underlying policies.

Excess insurance is used primarily in commercial insurance programs. It provides additional dollar amounts of insurance over the primary policies.


The limited environmental insurance provided under the commercial property and liability insurance policies in an insured’s program may prove to be inadequate and additional coverage is desired. The available environment insurance policies are many and varied rather than standard policies. Some of the types of environmental policies are 1) Site specific environmental impairment, 2) Underground storage tank coverage, 3) Remediation, 4) Contractors pollution and 5) Environmental professional’s errors and omissions.


In the insurance industry the term Risk Management has become commonly used to describe a program which includes the use of insurance and other alternative techniques to protect an individual or organization from economic loss.

  • Static risk. — This form of risk exists if a person or organization can only suffer a loss.
  • Dynamic risk. — This form of risk involves the chance of either a gain or a loss.

Developing a Risk Management Program.

Risk Management programs can be used by commercial organization or by an individual or family,

Identifying the risks. — Here the risk manager has to seek out and assemble information about the organization and its various exposures to loss.

  • “Who are we?”
  • “Where are we?”
  • “What are we?”

The answers to these three questions regarding entities, locations and operations are fundamental to the success of the risk management program.

Inspection and Review. — This is the second step in the identification process. “Inspection” involves a physical tour of the facilities to look for potential loss exposures. “Review” means to study documents and records to try to locate potential loss exposures.

There are four groups of loss exposures to identify and to review.

  • Liability loss exposures
  • Property loss exposures
  • Net income loss exposures
  • Personnel loss exposures

Analyzing the information obtained. — The next step in the development of a risk management program.

Selecting the best risk management technique. — The information that has been obtained by the risk manager must now be reviewed to determine which risk management techniques will be used.

There are four risk management techniques that are available to the risk manager in the development of the program.

  • Avoidance
  • Control
  • Retention
  • Transfer
  • Implementing. — When first considered the implementation of a risk management program seems to offer little problem.
  • Monitoring. — Once the program is in place, the risk manager must monitor and evaluate its performance on a continuous basis.


Life insurance is an important part of the insurance program of an individual, family or organization. Life insurance products can be effectively used to protect the assets and liabilities of an individual or family as well as provide a way to accumulate funds for retirement and estate planning.

Types of Life Insurance Policies.

The three basic types of life insurance are term insurance, whole life insurance and endowment insurance.

  • Term life insurance. — The two basic characteristics of term insurance are 1) it is only temporary protection because coverage terminates at the end of the policy term and 2) there is no cash value or savings element.
  • Whole life insurance. — This form of life insurance has a level premium and provides lifetime protection. The two basic types are ordinary life and limited pay life insurance. Ordinary life insurance. — This form has a level premium which is paid from the date purchased until death or age 100 when the face amount is paid to the policyholder. Limited payment life insurance. — This is a form of whole life insurance. The premiums are level but are paid only for a stated number of years.
  • Endowment insurance. — Endowment policies pay the face value to the named beneficiary if the insured would die prior to a stated date.

Underwriting life insurance.

There are three parties in the life insurance transaction. These are the insured, the beneficiary and the owner. The latter is the one that has control over the policy and can change the beneficiary or borrow against the policy reserve.

The underwriting activities used for life insurance can vary based on 1) the type of policy, 2) the age of the applicant, 3) the amount of insurance requested and 4) the responses given on a written application which is attached to and becomes a part of the insurance contract.

Options and Benefits for Policyholders.

Whole life insurance policies and some interest sensitive life policies have various options and benefits available to the insured during his or her lifetime.

Options and benefits dealing with policy reserves include the nonforfeiture options which are 1) Extended term insurance, 2) Paid-up insurance values, 3) Cash value and 4) Policy loan value. Options and benefits regarding premiums and changes in coverage and insurability are 1) Grace period, 2) Automatic premium loan, 3) Reinstatement provision, 4) Policy change provision and 5) Guaranteed insurability provision.

Tax treatment of life insurance premiums and proceeds.

The taxation of insurance policy features is primarily a function of the federal government however individual states may treat these funds differently and should be determined locally.

Individual life insurance. — The premiums paid by an individual for life insurance are not tax deductible.

Group life insurance. — Group life insurance premiums are tax deductible for the employer but only for the first $ 50,000 of coverage.


CREDIT LIFE INSURANCE. This is a form of life insurance that is used to pay a debt if the insured dies with a balance due.


Another of the contracts issued by life insurance companies is the annuity contract. This is not a life insurance policy but is designed to provide regular income payments to the policyholder, called an annuitant. Annuities differ from life insurance. — An annuity is used to spread invested capital and the interest it earns over a stated period such as the lifetime of the annuitant.

Special types of annuity contracts.

An annuity contract can be made up of a combination of features. Some of these forms of annuities are:

  • Temporary annuity. — This form expires when the annuitant dies or at the end of a state period.
  • Joint life annuity. — This form pays income to two or more annuitants at the same time but ceases when the first dies.
  • Joint and last survivor annuity. — Under this form income is paid to two or more annuitants at the same time and continues for the survivor when the first dies.
  • Survivorship or reversionary annuity. — The benefits are paid to the annuitant upon the death of a nominator who has purchased the annuity.
  • Annuity certain and for life. — Combines an annuity certain with a deferred life annuity.


Long – Term Care insurance was developed to provide benefits that would fund the cost of care in a nursing home or similar facility.

Coverage under the policy typically covers skilled nursing home care, intermediate nursing care and custodial care. Some policies also cover home healthcare services.


Health insurance provides economic protection for loss caused by accident or sickness. Because of this health insurance is important for individuals or families. The basic categories of health insurance are Medical Insurance and Disability Insurance.


The three basic categories of medical insurance are medical expense insurance, dental expense insurance and limited medical policies.

There are two benefit levels of medical expense insurance policies.

Basic Medical Expense coverages. — These coverages often have deductibles on an annual per person and per family basis.

The three areas of basic medical expense coverages are

  • Hospital expense
  • Surgical expense
  • Miscellaneous Medical expense

Major Medical Expense insurance. This coverage was originally designed as a separate policy form to overlay the basic medical expense policy.


Disability insurance policies provide income replacement when the insured is disabled because of accident or sickness.

Disabled can be defined in disability insurance contracts in a number of different ways. These are

  • The inability of the insured to perform the duties of his or her occupation,
  • The inability of the insured to perform the duties of any occupation for which he or she is fit on the basis of experience, education, or training and
  • The inability of the insured to perform any kind of work.

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