insurance

assurance,

device for indemnifying or guaranteeing an individual against loss. Reimbursement is made from a fund to which many individuals exposed to the same risk have contributed certain specified amounts, called premiums. Payment for an individual loss, divided among many, does not fall heavily upon the actual loser. The essence of the contract of insurance, called a policy, is mutuality. The major operations of an insurance company are underwriting, the determination of which risks the insurer can take on; and rate making, the decisions regarding necessary prices for such risks. The underwriter is responsible for guarding against adverse selection, wherein there is excessive coverage of high risk candidates in proportion to the coverage of low risk candidates. In preventing adverse selection, the underwriter must consider physical, psychological, and moral hazards in relation to applicants. Physical hazards include those dangers which surround the individual or property, jeopardizing the well-being of the insured. The amount of the premium is determined by the operation of the law of averages as calculated by actuaries. By investing premium payments in a wide range of revenue-producing projects, insurance companies have become major suppliers of capital, and they rank among the nation's largest institutional investors.

Common Types of Insurance

Life insurance, originally conceived to protect a man's family when his death left them without income, has developed into a variety of policy plans. In a "whole life" policy, fixed premiums are paid throughout the insured's lifetime; this accumulated amount, augmented by compound interest, is paid to a beneficiary in a lump sum upon the insured's death; the benefit is paid even if the insured had terminated the policy. Under "universal life," the insured can vary the amount and timing of the premiums; the funds compound to create the death benefit. With "variable life," the fixed premiums are invested in a portfolio (with earning reinvested), and the death benefit is based on the performance of the investment. In "term life," coverage is for a specified time period (e.g., 5–10 years); such plans do not build up value during the term. Annuity policies, which pay the insured a yearly income after a certain age, have also been developed. In the 1990s, life insurance companies began to allow early payouts to terminally ill patients.

Fire insurance usually includes damage from lightning; other insurance against the elements includes hail, tornado, flood, and drought. Complete automobile insurance includes not only insurance against fire and theft but also compensation for damage to the car and for personal injury to the victim of an accident (liability insurance); many car owners, however, carry only partial insurance. In many states liability insurance is compulsory, and a number of states have instituted so-called no-fault insuranceno-fault insurance,
type of indemnity plan, usually applied to automobile coverage, in which those injured in an accident receive direct payment from the company with which they themselves are insured.
..... Click the link for more information. plans, whereby automobile accident victims receive compensation without having to initiate a liability lawsuit, except in special cases. Bonding, or fidelity insurance, is designed to protect an employer against dishonesty or default on the part of an employee. Title insurance is aimed at protecting purchasers of real estate from loss by reason of defective title. Credit insurance safeguards businesses against loss from the failure of customers to meet their obligations. Marine insurance protects shipping companies against the loss of a ship or its cargo, as well as many other items, and so-called inland marine insurance covers a vast miscellany of items, including tourist baggage, express and parcel-post packages, truck cargoes, goods in transit, and even bridges and tunnels. In recent years, the insurance industry has broadened to guard against almost any conceivable risk; companies like Lloyd's will insure a dancer's legs, a pianist's fingers, or an outdoor event against loss from rain on a specified day.

See also health insurancehealth insurance,
prepayment plan providing services or cash indemnities for medical care needed in times of illness or disability. It is effected by voluntary plans, either commercial or nonprofit, or by compulsory national insurance plans, usually connected with a social
..... Click the link for more information. ; social welfaresocial welfare
or public charity,
organized provision of educational, cultural, medical, and financial assistance to the needy. Modern social welfare measures may include any of the following: the care of destitute adults; the treatment of the mentally ill; the
..... Click the link for more information. ; workers' compensationworkers' compensation,
payment by employers for some part of the cost of injuries, or in some cases of occupational diseases, received by employees in the course of their work.
..... Click the link for more information. .

The History of Insurance

The roots of insurance might be traced to Babylonia, where traders were encouraged to assume the risks of the caravan trade through loans that were repaid (with interest) only after the goods had arrived safely—a practice resembling bottomry and given legal force in the Code of Hammurabi (c.2100 B.C.). The Phoenicians and the Greeks applied a similar system to their seaborne commerce. The Romans used burial clubs as a form of life insurance, providing funeral expenses for members and later payments to the survivors.

With the growth of towns and trade in Europe, the medieval guilds undertook to protect their members from loss by fire and shipwreck, to ransom them from captivity by pirates, and to provide decent burial and support in sickness and poverty. By the middle of the 14th cent., as evidenced by the earliest known insurance contract (Genoa, 1347), marine insurance was practically universal among the maritime nations of Europe. In London, Lloyd's Coffee House (1688) was a place where merchants, shipowners, and underwriters met to transact business. By the end of the 18th cent. Lloyd's had progressed into one of the first modern insurance companies. In 1693 the astronomer Edmond Halley constructed the first mortality table, based on the statistical laws of mortality and compound interest. The table, corrected (1756) by Joseph Dodson, made it possible to scale the premium rate to age; previously the rate had been the same for all ages.

Insurance developed rapidly with the growth of British commerce in the 17th and 18th cent. Prior to the formation of corporations devoted solely to the business of writing insurance, policies were signed by a number of individuals, each of whom wrote his name and the amount of risk he was assuming underneath the insurance proposal, hence the term underwriter. The first stock companies to engage in insurance were chartered in England in 1720, and in 1735, the first insurance company in the American colonies was founded at Charleston, S.C. Fire insurance corporations were formed in New York City (1787) and in Philadelphia (1794). The Presbyterian Synod of Philadelphia sponsored (1759) the first life insurance corporation in America, for the benefit of Presbyterian ministers and their dependents. After 1840, with the decline of religious prejudice against the practice, life insurance entered a boom period. In the 1830s the practice of classifying risks was begun.

The New York fire of 1835 called attention to the need for adequate reserves to meet unexpectedly large losses; Massachusetts was the first state to require companies by law (1837) to maintain such reserves. The great Chicago fire (1871) emphasized the costly nature of fires in structurally dense modern cities. Reinsurance, whereby losses are distributed among many companies, was devised to meet such situations and is now common in other lines of insurance. The Workmen's Compensation Act of 1897 in Britain required employers to insure their employees against industrial accidents. Public liability insurance, fostered by legislation, made its appearance in the 1880s; it attained major importance with the advent of the automobile.

In the 19th cent. many friendly or benefit societies were founded to insure the life and health of their members, and many fraternal orders were created to provide low-cost, members-only insurance. Fraternal orders continue to provide insurance coverage, as do most labor organizations. Many employers sponsor group insurance policies for their employees; such policies generally include not only life insurance, but sickness and accident benefits and old-age pensions, and the employees usually contribute a certain percentage of the premium.

Since the late 19th cent. there has been a growing tendency for the state to enter the field of insurance, especially with respect to safeguarding workers against sickness and disability, either temporary or permanent, destitute old age, and unemployment (see social securitysocial security,
government program designed to provide for the basic economic security and welfare of individuals and their dependents. The programs classified under the term social security differ from one country to another, but all are the result of government legislation
..... Click the link for more information. ). The U.S. government has also experimented with various types of crop insurance, a landmark in this field being the Federal Crop Insurance Act of 1938. In World War II the government provided life insurance for members of the armed forces; since then it has provided other forms of insurance such as pensions for veterans and for government employees.

After 1944 the supervision and regulation of insurance companies, previously an exclusive responsibility of the states, became subject to regulation by Congress under the interstate commerce clause of the U.S. Constitution. Until the 1950s, most insurance companies in the United States were restricted to providing only one type of insurance, but then legislation was passed to permit fire and casualty companies to underwrite several classes of insurance. Many firms have since expanded, many mergers have occurred, and multiple-line companies now dominate the field. In 1999, Congress repealed banking laws that had prohibited commercial banks from being in the insurance business; this measure was expected to result in expansion by major banks into the insurance arena.

In recent years insurance premiums (particularly for liability policies) have increased rapidly, leaving unprecedented numbers of Americans uninsured. Many blame the insurance conglomerates, contending that U.S. citizens are paying for bad risks made by the companies. Insurance companies place the burden of guilt on law firms and their clients, who they say have brought unreasonably large civil suits to court, a trend that has become so common in the United States that legislation has been proposed to limit lawsuit awards. Catastrophic earthquakes, hurricanes, and wildfires in late 1980s and the 90s have also strained many insurance company's reserves.

Bibliography

See R. I. Mehr, Principles of Insurance (1985); E. J. Vaughn, Fundamentals of Risk and Insurance (1986).

Insurance

a system of measures under which a monetary (insurance) fund is established to compensate for losses or to pay other sums of money in cases of natural disasters, accidents, and other contingencies. Insurance, as K. Marx pointed out, is an economic necessity because social production needs funds to cover unusual losses caused by accidents and natural forces (see K. Marx and F. Engels, Soch., 2nd ed., vol. 24, p. 199).

Insurance developed in the Middle Ages, initially in commercial navigation, which was considered to involve many risks. Later it spread to other areas. Depending on the coverage, insurance is divided into property insurance (buildings, crops, livestock, household items, transportation) and personal insurance (life, health, disability).

In the USSR, state insurance is a new sociohistorical type of insurance, the basis for which was established by the nationalization of the insurance system. The need to nationalize insurance was substantiated by V. I. Lenin. For the first time, insurance became a state monopoly. General insurance matters are supervised by the Ministry of Finance of the USSR and the Central Administration of State Insurance, or Gosstrakh, an entity with economic accountability operating under the ministry. The Foreign State Insurance Committee, or Ingosstrakh, which operates on a joint-stock basis, conducts foreign business.

In the USSR, legislation regulates the arrangement and conditions of insurance and the types of insurance available. The Ministry of Finance of the USSR has established detailed regulations on different types of insurance. The legislations of the Union republics only deal with insurance issues that have been relegated to the jurisdiction of the republics by the legislation of the USSR.

The parties to an insurance arrangement are the insurance organization (Gosstrakh) and the insured, including kolkhozes and other cooperative and public organizations, as well as private citizens. Insurance may be obligatory, that is, the insurance contract is established exclusively by virtue of laws making the insurance obligatory, or voluntary, that is, the contract is made between the insurance organization and the insured. The insured pledges to make the specified payments to Gosstrakh, and, when covered damages occur, Gosstrakh pledges to pay the insured or some other person the insurance compensation if the policy is property insurance or the coverage if the policy is personal insurance.

A list of the property subject to obligatory insurance and to additional voluntary insurance is established by normative acts that regulate particular types of insurance. Generally, state property is not insured, and damage caused by natural disasters and other circumstances to property under the operational management of state organizations is compensated for from the state budget of the USSR. State property used by cooperative and public organizations as well as by private citizens is subject to obligatory insurance in accordance with the conditions (regulations) of its use. It may also be additionally insured at the discretion of the organizations or private citizens responsible for its preservation and maintenance. State organizations may insure property accepted for storage, sale, repair, or processing from citizens and kolkhozes and other cooperative and public organizations.

Insurance is obligatory for certain types of property belonging to kolkhozes, interkolkhoz organizations, and sovkhozes, such as crop yields, livestock, poultry, buildings, and transportation. It is also obligatory for the property belonging to private citizens, for example, for buildings and cattle. The law includes a comprehensive listing of the risks against which property is insured. The amount of insurance compensation is established by the law in advance and cannot be changed by an agreement of the parties. Other property belonging to cooperative and public organizations and to citizens is insured voluntarily.

An insurance contract must be drawn up in writing in the form of an insurance certificate, an insurance voucher, or an insurance policy issued by Gosstrakh.

The insured is obligated to pay insurance premiums to Gosstrakh, to maintain insured property in proper condition, to do everything possible to prevent the destruction of or damage to insured property, and, during and after a natural disaster or accident, to attempt to save insured property and prevent further damage to it. When a loss occurs, Gosstrakh is obligated to prepare a report on the damage incurred, to determine the amount of insurance compensation, and to pay the compensation according to an established time schedule.

Personal accident insurance is obligatory for passengers on railroads, water routes (except on suburban transit), airplanes, and public transportation (except on intraoblast transportation routes and on intrarepublic transportation routes in republics without oblast divisions). All passengers are considered insured from the moment of the call for boarding. The insurance fund for this purpose is collected during the sale of tickets and the collection of fees for the issuance of documents.

The life and health of the insured may also be covered by voluntary personal insurance. Such factors as a citizen’s age and state of health are taken into account when a personal insurance contract is prepared. There are various types of personal insurance, including mixed life insurance (including contracts with a double coverage clause), accident insurance, life insurance for loss arising out of death or disability, retirement insurance, children’s insurance, and employees’ insurance, which is paid by state, cooperative, and public organizations. A personal insurance contract may be drawn up naming a third party as beneficiary. The contract becomes effective upon the payment of the first premium. Gosstrakh pays the coverage regardless of whether or not the insured or the beneficiary receives payments from state social insurance and social security as compensation for the injury or damage suffered.

In capitalist countries property and personal insurance contracts are issued by large capitalist insurance companies. In these countries insurance is important in financing banking capital. Reinsurance is an agreement between insurance companies whereby one company undertakes to compensate another for part or all of the sum that the latter pays to its insured client. It is significant in the development of insurance and the concentration of insurance business in the hands of monopolies. A consequence of the concentration of capital, reinsurance in turn accelerates this concentration. The regulation of the insurance business by the bourgeois state is limited to the supervision by special government agencies of the establishment of the conditions of insurance and the creation, activity, and liquidation of insurance companies. Special laws on the supervision of insurance companies have been passed in most bourgeois countries.

REFERENCES

Grazhdanskoe zakonodatel’stvo: Sbornik normativnykh aktov. Moscow, 1974. Pages 800–48.
Grazhdanskoe i torgovoe pravo kapitalisticheskikh gosudarstv. Moscow, 1966. Pages 336–49.

A. IU. KABALKIN

builder’s risk insurance

A specialized form of property insurance to cover work, 1 in the course of construction. Also see property insurance.

insurance

Related to insurance: life insurance, health insurance, car insurance

Insurance

A contract whereby, for specified consideration, one party undertakes to compensate the other for a loss relating to a particular subject as a result of the occurrence of designated hazards.

The normal activities of daily life carry the risk of enormous financial loss. Many persons are willing to pay a small amount for protection against certain risks because that protection provides valuable peace of mind. The term insurance describes any measure taken for protection against risks. When insurance takes the form of a contract in an insurance policy, it is subject to requirements in statutes, Administrative Agency regulations, and court decisions.

In an insurance contract, one party, theinsured, pays a specified amount of money, called a premium, to another party, the insurer. The insurer, in turn, agrees to compensate the insured for specific future losses. The losses covered are listed in the contract, and the contract is called a policy.

When an insured suffers a loss or damage that is covered in the policy, the insured can collect on the proceeds of the policy by filing a claim, or request for coverage, with the insurance company. The company then decides whether or not to pay the claim. The recipient of any proceeds from the policy is called the beneficiary. The beneficiary can be the insured person or other persons designated by the insured.

A contract is considered to be insurance if it distributes risk among a large number of persons through an enterprise that is engaged primarily in the business of insurance. Warranties or service contracts for merchandise, for example, do not constitute insurance. They are not issued by insurance companies, and the risk distribution in the transaction is incidental to the purchase of the merchandise. Warranties and service contracts are thus exempt from strict insurance laws and regulations.

The business of insurance is sustained by a complex system of risk analysis. Generally, this analysis involves anticipating the likelihood of a particular loss and charging enough in premiums to guarantee that insured losses can be paid. Insurance companies collect the premiums for a certain type of insurance policy and use them to pay the few individuals who suffer losses that are insured by that type of policy.

Most insurance is provided by private corporations, but some is provided by the government. For example, the Federal Deposit Insurance Corporation (FDIC) was established by Congress to insure bank deposits. The federal government provides life insurance to military service personnel. Congress and the states jointly fund Medicaid and Medicare, which are Health Insurance programs for persons who are disabled or elderly. Most states offer health insurance to qualified persons who are indigent.

Government-issued insurance is regulated like private insurance, but the two are very different. Most recipients of government insurance do not have to pay premiums, but they also do not receive the same level of coverage available under private insurance policies. Government-issued insurance is granted by the legislature, not bargained for with a private insurance company, and it can be taken away by an act of the legislature. However, if a legislature issues insurance, it cannot refuse it to a person who qualifies for it.

History

The first examples of insurance related to marine activities. In many ancient societies, merchants and traders pledged their ships or cargo as security for loans. In Babylon creditors charged higher interest rates to merchants and traders in exchange for a promise to forgive the loan if the ship was robbed by pirates or was captured and held for ransom.

In postmedieval England, local groups of working people banded together to create "friendly societies," forerunners of the modern insurance companies. Members of the friendly societies made regular contributions to a common fund, which was used to pay for losses suffered by members. The contributions were determined without reference to a member's age, and without precise identification of what claims would be covered. Without a system to anticipate risks and potential liability, many of the first friendly societies were unable to pay claims, and many eventually disbanded. Insurance gradually came to be seen as a matter best handled by a company in the business of providing insurance.

Insurance companies began to operate for profit in England during the seventeenth century. They devised tables to mathematically predict losses based on various data, including the characteristics of the insured and the probability of loss related to particular risks. These calculations made it possible for insurance companies to anticipate the likelihood of claims, and this made the business of insurance reliable and profitable.

Gene Testing

When a person applies for medical, life, or disability insurance, the insurance company typically requires the disclosure of preexisting medical conditions and a family medical history. In some cases the applicant must undergo a physical examination. Based on this information, the insurance company decides whether to offer coverage and, if so, at what price.

Breakthroughs in genetics now allow persons to be tested for rare medical conditions such as cystic fibrosis and Huntington's disease. In addition, genetic testing can reveal an increased risk of more common conditions, including breast, colon, and prostate cancer; lymphoma; and leukemia. Concerns have been raised that once these tests become affordable, insurance companies will use the results to deny coverage.

Research studies published in the 1990s indicate that persons already have been denied insurance coverage because of the risk of genetic disease. The prospect of widespread genetic discrimination troubles many professionals in the medical and legal communities. It is unfair, they charge, to deny a person coverage or to charge higher premiums, based on a potential risk of genetic disease that the person is powerless to modify.

The insurance industry, which currently collects medical information on genetic disease through the inspection of medical records and family histories, responds that a fundamental principle in writing insurance is charging people rates that reflect their risks. This means that each applicant pays the fairest possible price, based on her individual characteristics. The industry also notes that the concerns about genetic testing do not come into play with large-group health plans, where rates are based on methods other than individual assessments.

Cross-references

Genetic Screening.

The British Parliament granted a Monopoly over the business of insurance in colonial America to two English corporations, London Assurance and Royal Exchange. During the 1760s, colonial legislatures gave a few American insurance companies permission to operate. Since the Revolutionary War, U.S. insurance companies have grown in number and size, with most offering to insure against a wide range of risks.

Regulation and Control

Until the middle of the twentieth century, insurance companies in the United States were relatively free from federal regulation. According to the U.S. Supreme Court in Paul v. Virginia, 75 U.S. (8 Wall.) 168, 19 L. Ed. 357 (1868), the issuing of an insurance policy did not constitute a commercial transaction. This meant that states had the power to regulate the business of insurance. In 1944 the high court held in United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533, 64 S. Ct. 1162, 88 L. Ed. 1440, that insurance did, in some cases, constitute a commercial transaction. This meant that Congress had the power to regulate it. The South-Eastern holding made the business of insurance subject to federal laws on rate fixing and monopolies.

Insurance is now governed by a blend of statutes, administrative agency regulations, and court decisions. State statutes often control premium rates, prevent unfair practices by insurers, and guard against the financial insolvency of insurers to protect insureds. At the federal level, the mccarran-ferguson act (Pub. L. No. 79-15, 59 Stat. 33 [1945] [codified at 15 U.S.C.A. §§ 1011–1015 (1988)]) permits states to retain regulatory control over insurance, as long as their laws and regulations do not conflict with federal antitrust laws on rate fixing, rate discrimination, and monopolies.

In most states, an administrative agency created by the state legislature devises rules to cover procedural details that are missing from the statutory framework. To do business in a state, an insurer must obtain a license through a registration process. This process is usually managed by the state administrative agency. The same state agency may also be charged with the enforcement of insurance regulations and statutes.

Administrative agency regulations are many and varied. Insurance companies must submit to the governing agency yearly financial reports regarding their economic stability. This requirement allows the agency to anticipate potential insolvency and to protect the interests of insureds. Agency regulations may specify the types of insurance policies that are acceptable in the state, although many states make these declarations in statutes. The administrative agency is also responsible for reviewing the competence and ethics of insurance company employees.

The judicial branches of governments also shape insurance law. Courts are often asked to resolve disputes between the parties to an insurance contract, and disputes with third parties. Court decisions interpret the statutes and regulations based on the facts of the case, creating many rules that must be followed by insurers and insureds.

Insurance companies may be penalized for violating statutes or regulations. Penalties for misconduct include fines and the loss or suspension of the company's business license. In some states, if a court finds that an insurer's denial of coverage or refusal to defend an insured in a lawsuit was unreasonable, the insurance company may be required to pay court costs, attorneys' fees, and a percentage beyond the insured's recovery.

Types of Insurance

Insurance companies create insurance policies by grouping risks according to their focus. This provides a measure of uniformity in the risks that are covered by a type of policy, which in turn allows insurers to anticipate their potential losses and to set premiums accordingly. The most common forms of insurance policies include life, health, automobile, homeowners' and renters', Personal Property, fire and casualty, marine, and inland marine policies.

Life insurance provides financial benefits to a designated person upon the death of the insured. Many different forms of life insurance are issued. Some provide for payment only upon the death of the insured; others allow an insured to collect proceeds before death.

A person may purchase life insurance on his or her own life for the benefit of a third person or persons. Individuals may even purchase life insurance on the life of another person. For example, a wife may purchase life insurance that will provide benefits to her upon the death of her husband. This kind of policy is commonly obtained by spouses and by parents insuring themselves against the death of a child. However, individuals may only purchase life insurance on the life of another person and name themselves beneficiary when there are reasonable grounds to believe that they can expect some benefit from the continued life of the insured. This means that some familial or financial relationship must unite the beneficiary and the insured. For example, a person may not purchase life insurance on the life of a stranger in the hope that the stranger will suffer a fatal accident. Health insurance policies cover only specified risks. Generally, they pay for the expenses incurred from bodily injury, disability, sickness, and accidental death. Health insurance may be purchased for one's self and for others.

All automobile insurance policies contain liability insurance, which is insurance against injury to another person or against damage to another person's vehicle caused by the insured's vehicle. Auto insurance may also pay for the loss of, or damage to, the insured's motor vehicle. Most states require that all drivers carry, at a minimum, liability insurance under a no-fault scheme. In states that recognize no-fault insurance, damages resulting from an accident are paid for by the insurers, and the drivers do not have to go to court to settle the issue of damages. Drivers in these states may bring suit over an accident only in cases of egregious conduct, or where medical or repair costs exceed an amount defined by statute.

Homeowners' insurance protects homeowners from losses relating to their dwelling, including damage to the dwelling; personal liability for injury to visitors; and loss of, or damage to, property in and around the dwelling. Renters' insurance covers many of the same risks for persons who live in rented dwellings.

As its name would suggest, personal property insurance protects against the loss of, or damage to, certain items of personal property. It is useful when the liability limit on a homeowner's policy does not cover the value of a particular item or items. For example, the owner of an original painting by Pablo Picasso might wish to obtain, in addition to a homeowner's policy, a separate personal property policy to insure against loss of, or damage to, the painting.

Businesses can insure against damage and liability to others with fire and casualty insurance policies. Fire insurance policies cover damage caused by fire, explosions, earthquakes, lightning, water, wind, rain, collisions, and riots. Casualty insurance protects the insured against a variety of losses, including those related to legal liability, Burglary and theft, accidents, property damage, injury to workers, and insurance on credit extended to others. Fidelity and surety bonds are temporary, specialized forms of casualty insurance. A fidelity bond insures against losses relating to the dishonesty of employees, and a surety bond provides protection to a business if it fails to fulfill its contractual obligations.

Marine insurance policies insure transporters and owners of cargo shipped on an ocean, a sea, or a navigable waterway. Marine risks include damage to cargo, damage to the vessel, and injuries to passengers.

Inland marine insurance is used for the transportation of goods on land and on land-locked lakes.

Many other types of insurance are also issued. Group health insurance plans are usually offered by employers to their employees. A person may purchase additional insurance to cover losses in excess of a stated amount or in excess of coverage provided by a particular insurance policy. Air-travel insurance provides life insurance benefits to a named beneficiary if the insured dies as a result of the specified airplane flight. Flood insurance is not included in most homeowners' policies, but it can be purchased separately. Mortgage insurance requires the insurer to make mortgage payments when the insured is unable to do so because of death or disability.

Contract and Policy

An insurance contract cannot cover all conceivable risks. An insurance contract that violates a statute, is contrary to public policy, or plays a part in some prohibited activity will be held unenforceable in court. A contract that protects against the loss of burglary tools, for example, is contrary to public policy and thus unenforceable.

Insurable Interest

To qualify for an insurance policy, the insured must have an insurable interest, meaning that the insured must derive some benefit from the continued preservation of the article insured, or stand to suffer some loss as a result of that article's loss or destruction. Life insurance requires some familial and pecuniary relationship between the insured and the beneficiary. Property insurance requires that the insured must simply have a lawful interest in the safety or preservation of the property.

Premiums

Different types of policies require different premiums based on the degree of risk that the situation presents. For example, a policy insuring a homeowner for all risks associated with a home valued at $200,000 requires a higher premium than one insuring a boat valued at $20,000. Although liability for injuries to others might be similar under both policies, the cost of replacing or repairing the boat would be less than the cost of repairing or replacing the home, and this difference is reflected in the premium paid by the insured.

Premium rates also depend on characteristics of the insured. For example, a person with a poor driving record generally has to pay more for auto insurance than does a person with a good driving record. Furthermore, insurers are free to deny policies to persons who present an unacceptable risk. For example, most insurance companies do not offer life or health insurance to persons who have been diagnosed with a terminal illness.

Claims

The most common issue in insurance disputes is whether the insurer is obligated to pay a claim. The determination of the insurer's obligation depends on many factors, such as the circumstances surrounding the loss and the precise coverage of the insurance policy. If a dispute arises over the language of the policy, the general rule is that a court should choose the interpretation that is most favorable to the insured. Many insurance contracts contain an Incontestability Clause to protect the insured. This clause provides that the insurer loses the right to contest the validity of the contract after a specified period of time.

An insurance company may deny or cancel coverage if the insured party concealed or misrepresented a material fact in the policy application. If an applicant presents an unacceptably high risk of loss for an insurance company, the company may deny the application or charge prohibitively high premiums. A company may cancel a policy if the insured fails to make payments. It also may refuse to pay a claim if the insured intentionally caused the loss or damage. However, if the insurer knows that it has the right to rescind a policy or to deny a claim, but conveys to the insured that it has voluntarily surrendered such right, the insured may claim that the insurer waived its right to contest a claim.

An insurer may have a duty to defend an insured in a lawsuit filed against the insured by a third party. This duty usually arises if the claims in the suit against the insured fall within the coverage of a liability policy.

If a third party caused a loss covered by a policy, the insurance company may have the right to sue the third party in place of the insured. This right is called Subrogation, and it is designed to make the party that is responsible for a loss bear the burden of the loss. It also prevents an insured from recovering twice: once from the insurance company, and once from the responsible party.

An insurance company can subrogate claims only on certain types of policies. Property and liability insurance policies allow subrogation because the basis for the payment of claims is indemnification, or reimbursement, of the insured for losses. Conversely, life insurance policies do not allow subrogation. Life insurance does not indemnify an insured for a loss that can be measured in dollars. Rather, it is a form of investment for the insured and the insured's beneficiaries. A life insurance policy pays only a fixed sum of money to the beneficiary and does not cover any liability to a third party. Under such a policy, the insured stands no chance of double recovery, and the insurance company has no need to sue a third party if it must pay a claim.

Terrorism Insurance

Following the attacks on the World Trade Center and the Pentagon, insurance premiums skyrocketed, especially for tenants of highly visible landmarks like sports arenas and skyscrapers. The Terrorism Risk Insurance Act of 2002 (TRIA), Pub. L. No. 107–297, 116 Stat. 2322, established a temporary federal program providing for a shared public and private compensation for insured losses resulting from acts of terrorism. The act, which is valid only for three years, provides that insurers must make terrorism coverage available and must provide policy-holders with a clear and conspicuous disclosure of the premium charged for losses covered by the program. TRIA caps the exposure of insurance carriers to future acts of foreign terrorism, leaving the federal government to reimburse the insurance company for excess losses up to a maximum of $100 billion per year. Under TRIA, the Treasury Department covers 90 percent of terrorism claims when an insurer's exposure exceeds 7 percent of its commercial premiums in 2003, 10 percent of premiums in 2004, and 15 percent in 2005.

TRIA defines an act of terrorism as any act that is certified by the U.S. secretary of the treasury, in concurrence with the U.S. Secretary of State and U.S. attorney general. The act of terror must result in damage within the United States, or outside the United States in the case of an airplane or a U.S. mission. A terrorist act must be committed by an individual or individuals acting on behalf of any foreign person or foreign interest. An event must be a violent act or an act that is dangerous to human life, property, or infrastructure. Nuclear, biological, and chemical attacks are not covered, and an event cannot be certified as an act of terrorism unless the total damages exceed $5 million.

insurance

n. a contract (insurance policy) in which the insurer (insurance company) agrees for a fee (insurance premiums) to pay the insured party all or a portion of any loss suffered by accident or death. The losses covered by the policy may include property damage from accident or fire, theft or intentional harm, medical costs and/or lost earnings due to physical injury, long-term or permanent loss of physical capacity, claims by others due to the insured's alleged negligence (eg. public liability auto insurance), loss of a ship and/or cargo, finding a defect in title to real property, dishonest employees, or the loss of someone's life. Life insurance may be on the life of a spouse, a child, one of several business partners, or an especially important manager ("key man" insurance), all of which is intended to provide for survivors or to ease the burden upon the loss of a financial contributor. So-called "mortgage" insurance is life insurance which will pay off the remaining amount due on a home loan on the death of the husband or wife. Life insurance proceeds are usually not included in the probate of a dead person's estate, but the funds may be counted by the Internal Revenue Service in calculating estate tax. Insurance companies may refuse to pay a claim by a third party against an insured, but at the same time may be required to assume the legal defense (pay attorney's fees or provide an attorney) under the doctrine of "reservation of rights." (See: insured, insurer, workmen's compensation)

insurance

a contract under which one party (the insurer), in consideration of receipt of a premium, undertakes to pay money to another person (the assured) on the happening of a specified event (as, for example, on death or accident or loss or damage to property). The instrument containing the terms of the contract is known as a policy. Contracts of insurance are uberrimae fidei, requiring full disclosure by the assured of all facts material to the risk insured. See also LIFE ASSURANCE, INSURABLE INTEREST.

INSURANCE, contracts. It is defined to be a contract of indemnity from loss or damage arising upon an uncertain event. 1 Marsh. Ins. 104. It is more fully defined to be a contract by which one of the parties, called the insurer, binds himself to the other, called the insured, to pay him a sum of money, or otherwise indemnify him in case of the happening of a fortuitous event, provided for in a general or special manner in the contract, in consideration of a premium which the latter pays, or binds himself to pay him. Pardess. part 3, t. 8, n. 588; 1 Bouv. Inst. n. 1174.
2. The instrument by which the contract is made is denominated a policy; the events or causes to be insured against, risks or perils; and the thing insured, the subject or insurable interest.
3. Marine insurance relates to property and risks at sea; insurance of property on shore against fire, is called fire insurance; and the various contracts in such cases, are fire policies. Insurance of the lives of individuals are called insurances on lives. Vide Double Insurance; Re-Insurance.

INSURANCE, MARINE, contracts. Marine insurance is a contract whereby one party, for a stipulated premium, undertakes to indemnify the other against certain perils or sea risks, to which his ship, freight, or cargo, or some of them may be exposed, during a certain voyage, or a fixed period of time. 3 Kent, Com. 203; Boulay-Paty, Dr. Commercial, t. 10.
2. This contract is usually reduced to writing; the instrument is called a policy of insurance. (q. v.)
3. All persons, whether natives, citizens, or aliens, may be insured, with the exception of alien enemies.
4. The insurance may be of goods on a certain ship, or without naming any, as upon goods on board any ship or ships. The subject insured must be an insurable legal interest.
5. The contract requires the most perfect good faith; if the insured make false representations to the insurer, in order to procure his insurance upon better terms, it will avoid the contract, though the loss arose from a cause unconnected with the misrepresentation, or the concealment happened through mistake, neglect, or accident, without any fraudulent intention. Vide Kent, Com. Lecture, 48; Marsh. Ins. c. 4; Pardessus, Dr. Com. part 4, t. 5, n. 756, et seq.; Boulay-Paty, Dr. Com. t. 10.

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Common Types of Insurance

The History of Insurance

Bibliography

Insurance

REFERENCES

builder’s risk insurance

insurance

in·sur·ance

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Patient discussion about insurance

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Insurance

History

Gene Testing

Cross-references

Regulation and Control

Types of Insurance

Contract and Policy

Insurable Interest

Premiums

Claims

Terrorism Insurance

Further readings

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Synonyms for insurance

noun assurance

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noun protection

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Synonyms for insurance

noun promise of reimbursement in the case of loss

Related Words

noun written contract or certificate of insurance

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noun protection against future loss

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