Breaking down an “Insurance Contract”


An insurance policy is a type of a Contract between two parties: you and the Insurance Company. Just like every business Contract, an Insurance policy contains all essential terms and definitions related to your agreement with the Insurer. In short, a policy defines in which way and under which circumstances an Insurer will pay benefits to the Insured party if certain events/event occurs.

By learning how to read and understand each aspect of your Insurance policy you can save money as you won’t need an advice from a lawyer and you can protect yourself from any unfavorable terms that an Insurer may try to hide inside the Contract.

Normally, an Insurance policy cannot be customized, so a policyholder just agrees with the terms and conditions offered and signs up the Contract. That is why Insurance policy is classified as a Contract of Adhesion. Now, let’s take a closer look at the features and structure of a typical Insurance Contract.

The structure of an Insurance Policy

Insurance policy consists of several elements and additions where all terms and intentions of parties are defined.

Declarations. This is the typical section for every Insurance policy where the intentions of both parties are stated. Also, this part defines the features of the parties, the types of risks that Insurer covers, the premiums and the benefits that the policyholder receives if the insurable event occurs.

Insurance Policy

Definitions. This is the part where all terms are defined according to the legal dictionary (see the most important terms and their definitions below). This part allows a client get an understanding of specific “language” the policy is written in.

List of perils. Here is the key part for the policyholder as this is where all perils that Insurer is willing to cover are listed. It is very important to make sure that everything you need is included and covered. Each peril must be explained in detail to avoid possible misunderstanding or unclear definition of circumstances under which the Insurer consider the peril as a covered event (it is especially important for Car policies).

Also, some types of policies may contain “All risks coverage” section. That means all kinds of risks are covered, except those which are listed in the separate list. If the certain peril is not listed, it is automatically covered.

insurance policy

Conditions. Conditions section describes potential circumstances under which an insurable event may occur. Conditions are described in the most detailed way to include possible covered circumstances and exclude circumstances where Insurer’s obligations will not come into effect.

Conditions section may take the major part of an Insurance contract, especially when it comes to homeowner’s Insurance, car policies and Disability Insurance (or Income Protection Insurance).

Endorsements. This is the separate part of a policy which is attached to the main documents. Endorsement describes certain changes or modifications in the “Conditions” section. Endorsements have more legal power than conditions described in the main Contract, so if there is an arguable case or circumstance, lawyers pay attention exactly to what’s written on the Endorsements part. Endorsements are a way an Insurer may customize a policy for specific needs of a particular client. The sections “exclusions” (if it’s a property Insurance policy) contains the list of property which is not covered.


Policy Form or Coverage form is a single document with the unified brief definitions of coverage, conditions, exclusions and other features. Typically, policy forms are strictly standardized and can barely be customized in a case the client needs specific options.

Riders are the type of policy amendments that are purposed to convey any changes happening in terms and conditions in the main policy.

Jackets. Insurance Policy Jackets or binders are the types of boilerplates that always go with the policy.

Key Insurance terms and definitions you will see in your Policy

Here is the list of specific terms you will see in your Insurance policy most often.

Accident. In Insurance, it is an official term of an Insured unforeseen event that has happened to a policyholder (with no intentions from his side). An accident is always an event that could not be predicted and therefore avoided by a policyholder.


Actual Cash Value – is the actual value of the Insured property which has to be repaid to a policyholder in a case of damage. Actual value is calculated as the market value of the property to be replaced, minus its depreciation.

All-Risk – a form of policy that covers all types of risks, excluding the risks that are listed in amendments.

Annuity – is an income which is provided according to the policy during the lifetime of the Contract.

Beneficiary – a third person that has a legal right to receive payments.


Business Interruption is an insured event during which the business property (equipment) is damaged which resulted in financial loss.

Cash Equivalent – the current market cost of assets of an individual or a business entity.

Claim – is a request for money remittance from the side of an Insured party to an Insurer when the covered event has occurred.

Commission is an amount of money paid to an Insurance agent who represents the Insurer and sells Insurance services to a client. The amount could be paid by both parties or by the Insured one solely.

Deductible – is the amount of money a policyholder is willing to pay from his own pocket (when it comes to medical care and Health Insurance). With all other types of Insurances, deductible is a part of financial loss the policyholder covers himself.

health insurance

Direct Loss is a loss which appeared from the covered damage directly.

Health Plan – is a type of a Health Insurance policy with the certain number of medical care options.

Negligence is a failure to execute certain obligations or meet responsibilities which led to a loss or damage.

Occurrence is a form of an accident which resulted in bodily injuries or property’s damage.

Peril – a type of hazard which is covered by the Insurer under the conditions described in a Contract.


Premium – monthly payments made by a policyholder as a price for transferring risks to Insurance Company.

Reinsurance – risks transferring from one Insurance Company to another.

Standard Risk – is a term that describes an individual who imposes standard types and scale of risk (according to Company’s written risks standards).

Term Insurance – is an Insurance policy that takes effect during the certain period of time and expires at a certain date.


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