Reviewed by Stefan Tirschler
pol·i·cy | ˈpɑləsɪ
Definition: The contract of insurance between an insurer and insured.
Michael carefully reviewed his new insurance policy.
An insurance policy is a contract between an insurer and an insured.
The insurer is the insurance company, the one agreeing to pay claims. The insured is the person who bought the policy to protect them, their home, and their stuff.
Insurance policies describe what sort of claims the insurer is agreeing to pay and the various responsibilities of both parties (the insurer and the insured).
Insurance contracts are based on the principle of utmost good faith. That means that both parties to the contract (the insurance company and the person buying the policy) must be forthcoming about all the details that might affect the contract.
Insurance companies are expected to be transparent about all the details of the insurance contract. At Square One, we post our policy contract on the internet so that any prospective customer can read it before they decide to buy a policy. Insureds, meanwhile, are expected to answer all the insurance company’s questions truthfully and completely.
If either party doesn’t uphold their end, they’re not exercising utmost good faith.
Most home insurance contracts last for one year. That means the policy’s coverages will stay the same for one year (unless the insured requests a change). It also means the premiums charged will stay the same.
At the end of the year, the insurance company will send the customer a renewal notice, which tells them about any changes in their coverage or their premiums. If the insured receives the renewal notice and continues to pay the new premium, then they are deemed to have accepted the renewal. This is important: it helps to ensure that a homeowner doesn’t accidentally wind up unprotected if their renewal notice is lost in the mail, or if they forget to request coverage for another year.
Insurance customers can change or cancel their policy at any time, even in the middle of the policy term. The insurance company can only end a policy after the term ends, except in certain cases (like a customer not paying their premiums).
Even just within the home insurance industry, every insurance company writes their policy documents a little differently. Most policies share the same elements, though.
The actual text of an insurance contract is often called a policy wording. This term is interchangeable with “policy.”
If you look at a typical policy from Square One, you’ll see nine different sections. Other insurers may combine some of these, or order them differently, but any home insurance policy will contain most of the same information.
At Square One, we write our policy wordings in plain English, so they’re much easier to understand than many contracts. As an insurance customer, it’s important to make sure you read and understand your insurance policy so you’re clear about what coverage you have. If there’s anything you’re unclear on, get in touch with your insurance provider; they’ll be happy to clarify.
Here are the sections in a home insurance policy from Square One, and what you’ll find in each:
Insuring agreement. This section describes the basic agreement between the insurer and the insured: insured pays the premium, insurer pays for any insured claims.
Definitions. The definitions section lays out the meanings of important terms that appear throughout the policy.
Property coverages. Here you’ll find descriptions of which types of property the policy insures and the conditions for covering each type. Those conditions include what types of loss or damage are insurable, how the insurer calculates settlement amounts, and the maximum they’ll pay for each type of property.
Loss of Use coverages. This section describes the coverages available to insureds when they’ve lost the use of their insured property. Additional Living Expenses, which cover extra expenses if you’re forced to move out of your home, fall under this section.
Liability coverages. This section explains how the coverage works for personal and premises liability. These coverages protect the insured when they’re responsible for property damage or bodily injury to other people.
Legal protection coverages. Square One offers an optional legal protection coverage that provides extra financial protection for certain legal issues, and access to a legal help line. If you choose to add this coverage, you’ll see it mentioned here.
Exclusions. Policies sold by Square One are comprehensive home insurance policies, which means they cover all types of loss except ones that the policy specifically excludes. This is the section where you’ll find the property and perils that your policy doesn’t cover.
Deductibles. This sections lists the different deductibles that apply to the policy, and under which conditions each one would apply.
Additional conditions and addendums. This last section has all the miscellaneous conditions that apply to the whole policy. Among other things, here you’ll find the statutory conditions, which are conditions imposed by law on all insurance contracts. Statutory conditions are the same no matter which insurance company you’re with. Addendums are extra sections tacked on to the end of the policy wordings. For example, if you bought legal protection coverage or Condo Owner’s Protection from Square One, the wordings for those coverages will appear as addendums.
Insurance functions by taking the premiums of many people and pooling them together to cover the losses of the relatively few people who experience them.
Each insurance company manages this by employing actuaries to make careful predictions about how much money they’re going to need to pay claims each year. With that prediction, they calculate how much money they need to collect from their customers.
However, not every insurance customer pays the same premium. Premiums vary from customer to customer based on many factors, but the risk of insuring each home is the main one. Homes with a higher probability of experiencing a loss are more expensive to insure.
Every insurance company has their own method of calculating the risk of insuring a home. They factor in things like the home’s age, construction type, location, plus local climate patterns, earthquake risk, crime statistics, and so forth. Based on these calculations, the insurer comes up with a price that they need to accept the risk of the individual home. If the customer accepts that price and the terms of the contract, the insurer will issue them their insurance policy.
Those are the basics of how insurance works.
Even when you take precautions, accidents can happen. Home insurance is one way to protect your family against financial losses from accidents. And, home insurance can start from as little as $12/month.