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Understanding the Components of an Insurance Contract

Checklist Description

This checklist outlines the components of an insurance contract.

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Within all the small print that comes with any new insurance contract, there are some of the most complicated legal provisions and contractual terms that you are likely to find anywhere. The insurance industry spends millions on lawyers’ fees and has teams of in-house professionals constantly updating and revising the terms of their contracts to cover every possible eventuality. It is, therefore, worthwhile being familiar with some of the main components of these contracts.

Agreement (proposal and acceptance): There can be no contract without the compliance or mutual consent of the parties. The agreement reviews the major pledges of the insurance company. It explains the dangers covered, the risks assumed, and the nature of coverage.

Utmost good faith: This requires both parties to the insurance contact to deal in good faith. In particular, it imposes on the insured a duty to disclose all relevant facts that relate to the risk to be covered.

Competent Parties: For a contract to be binding, both parties must have the legal power to sign a contract.

Declarations: These identify who or what is insured, the insured’s address, the insuring company, what risks or property are covered, the amount of insurance, any applicable deductibles, the policy period, and the premium amount.

Conditions: These are the provisions, rules of conduct, duties, and obligations required for coverage. If the policy conditions are not met, the insurer can deny the claim.

Exclusions: These clauses describe property, perils, hazards, or losses arising from specific causes that are not covered by the policy.

All insurance contracts basically have the same principles and processes. They assume the risk of an event that may or may not occur, and pay the cost of it if it does.

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  • Businesses can cover financial risks by taking out insurance in areas such as property, public and product liability, professional indemnity, employee benefits, employers’ liability, motor, and medical expenses.

  • Life insurance provides a monetary benefit to a descendant’s family or other designated beneficiary, and may specifically provide income for an insured person’s family or cover funeral and other final expenses.

  • Life-insurance policies often allow the option of having the proceeds paid to the beneficiary either as a lump sum cash payment or as an annuity.

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  • The complexity of business insurance contracts requires expert help, which is not always unbiased.

  • Cover can sometimes include remote risks that could be covered out of a specific set-aside investment fund.

  • This fund could be earning income for the business and used only if the risk occurs.

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Action Checklist

  • Consider how existing policies insure against multiple minor events as well as more significant/catastrophic single incidents. Examine whether particular exclusion clauses could leave your business exposed to risks you thought were covered.

  • In what circumstances will the policy pay out and what risks are not covered?

  • Try to quantify in financial terms how falling foul of various risks could impact on your business. Only once an actual liability figure is available can you expect an insurance provider to be able to give a quotation to cover that risk.

  • Be prepared to seek the advice of specialist risk consultants. The field of commercial insurance can be far more complex than its consumer equivalent and risk consultants can help companies to understand and evaluate both risks and potential solutions.

  • Consider the conditions you must meet to keep the policy valid.

  • Get several quotes and at least two expert opinions.

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Dos and Don’ts


  • Regularly update your frameworks for assessing risks and keep your policies up to date to reflect those risks.


  • Don’t make the mistake of basing a decision purely on price. Insurance is highly complex and insurance solutions are many and varied.

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Further reading


  • Clarke, Malcolm A. Law of Insurance Contracts. 6th ed. London: Informa, 2009.
  • Stempel, Jeffrey W. Stempel on Insurance Contracts. 3rd ed. New York: Aspen Publishers, 2006.
  • Tarr, Julie-Anne. Disclosure and Concealment in Consumer Insurance Contracts. London: Cavendish, 2002.


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