The Components of Insurance Contracts

Most insurance policies, whether they cover homes, cars, life, health or other risks, share similar elements in their construction. Despite the differences in items covered, amounts of compensation or benefits, or beneficiaries, insurance policies have components in common. Knowing the components, as well as comprehending the language that's used, is key to understanding your insurance policy.

Declarations normally appear on the first page of your policy, called the declarations page, title page or policy face page. The page identifies you as the insured party, outlines the risks (such as property, life or health) to be covered, any limits of the policy, and the time period that the policy will be in force. An auto insurance title or declarations page would describe the vehicle being insured (make, model, year, color, style, vehicle ID number), your name (if it's you being covered), premium amounts and conditions ($400 on Jan. 1 and July 1 each year, for instance), and the deductible amount. Other types of insurance, such as life insurance, will contain similar information.

Ensuing pages of the policy will contain a section dedicated to definitions of common insurance terms you'll encounter when reading the policy. Make sure to familiarize yourself with these definitions, or refer to them as you review the policy.

The insuring agreement is the thrust of the policy, summarizing the main premises (and promises) for which losses will be compensated and benefits paid. A homeowner's policy, for example, will outline the perils covered (such as windstorms and hail, theft and vandalism) and perils not covered (if it's an all-risk coverage policy).

Any exclusions not covered in the insuring agreement will be included in this section, or there may be a redundant re-statement of exclusions. Either way, the exclusions generally are of three types: excluded perils or reasons for losses, excluded losses themselves, and excluded property. For instance, homeowner policies almost always exclude flood, earthquake and nuclear radiation damage (although separate coverage or riders can address flood and, sometimes, earthquake risks). Damage from standard wear and tear, such as faded paint, also is excluded. And property—maybe your car or a pet—typically is excluded in a homeowner's policy. Some perils simply are considered un-insurable, such as the presence of extraordinary hazards or coverage provided by other insurance (such as your car being covered by vehicle insurance).

The conditions included in a policy are rules of conduct, duties and obligations that specify or limit the insurance company's need or promise to pay a claim, as in the case of fraud, and includes requirements for the insured party, such as having to provide proof of loss and proof of value (receipts, for example).

All endorsements or riders—which basically are attachments to an existing policy—supersede the original contract so long as they don't violate any laws. These modifications normally are added when the insured person adds to his property in some way. For example, a homeowner who adds a dormer or buys an expensive piece of jewelry will probably need to add a rider to his existing policy to cover the additional risk. It's a good idea to periodically review your policy and adjust it according to any lifestyle or property changes. Endorsements and riders may be included under a "miscellaneous provisions" heading.