QUESTIONS & ANSWERS

What is an Insurance Policy?
What is an "Insurable Interest"?
How does an Insurance Policy give "Protection"?
What are "Exclusions" and "Limitations" and how do they affect coverage?
Are there government agencies that regulate how insurance companies operate?
Why do I need Insurance?
Does an employer have to provide medical, life and similar insuarnce coverages for employees?
Are there limitations on insurance company business practices?
Can an Insurance Company refuse to sell me insurance for any reason it chooses?
Are there limitations on what an Insurance Company can charge for insurance?
Can an Insurance Company cancel the policy for any reason it chooses?
Can I cancel my policy at any time and will there be a penalty?
If I miss a premium payment and get cancellation notice, is there anything I can do to keep the policy?
What happens if there is a claim?
What the insured must do if there is a claim.
What happens if I am sued?
What if the company won't pay the claim?

What is an Insurance Policy?
An insurance policy is a legally binding contract between an insurance company and the person who buys the policy, commonly called the insured or the policy holder. In exchange for payment of a specified amount of money, the premium, the insurance company agrees to pay for certain types of losses or damages as specified by the contract. When a loss occurs which meets all the requirements described by the terms of the policy, the loss is said to be covered by that policy.

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What is an "Insurable Interest"?
A person has an insurable interest in something when loss or damage to that property would cause that person to suffer a financial loss. For example, if the house you own is damaged or destroyed by fire, the value of your house has been reduced, and whether you pay to have the house repaired or rebuilt, or sell it at a reduced prince, you have suffered a financial loss as a result of the fire. On the other hand, if your neighbor's house, which you do not own, is damaged by fire, you may feel sorry for your neighbor, but you have not suffered a financial loss from the fire. You do not have an insurable interest in your neighbor's house.

It is basic to insurance law that the person who buys the insurance policy have an insurable interest in the property insured. For property insurance, you must have an ownership interest in the property, or have the right to possession or use of the property. For purposes of life insurance, everyone is considered to have an insurable interest in his or her own life, as well as the lives of spouses and dependents. For property and casualty insurance the insurable interest must exist both at the time the insurance is purchased and at the time of the loss. For life insurance, the insurable interest must exist only at the time of purchase.

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How does an Insurance Policy give "Protection"?
Insurance policies give protection against economic, or monetary, loss. For example, an insurance policy may pay the cost of repairing or replacing a damaged automobile or to rebuild a building damaged by fire, the cost of medical treatment for an injury or illness, or for the lost income of a person who cannot work due to disability.

It is important to understand this limitation of insurance, since there are many kinds of losses which cannot be compensated by money. For example, insurance cannot cover the "sentimental" value of an item of property. When you buy homeowner's insurance, you are insuring only the economic value of the home, i.e., the cost to repair or rebuild it. When you buy life insurance, you insure only the economic value of the insured person, i.e., the financial consequences that can be expected to result from the person's death.

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What are "Exclusions" and "Limitations" and how do they affect coverage?
An exclusion is a statement in an insurance policy which describes a condition or type of loss that is not covered by the policy. An exclusion is an exception to the general statement of coverage found in the policy. A typical exclusion found in nearly every property or casualty insurance policy is loss caused by acts of war, or by acts of God.

A limitation is also an exception to the general statement of coverage, but is applicable only under certain circumstances or for a specified period of time. A typical limitation found in health insurance policies is the "pre-existing conditions" provision, by which an illness or other medical condition that has been treated or diagnosed before application for the policy was made is not covered, or is not covered for a period of time after the effective date of the coverage provided by the policy.

Since exclusions and limitations "take away" some of the coverage of the policy, the law requires that they be clearly written and very specific. If there is a reasonable difference of opinion over how to interpret the meaning of an exclusion or a limitation, the court will generally resolve the dispute in favor of the policy holder by adopting the narrowest interpretation of the provision.

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Are there government agencies that regulate how insurance companies operate?
The individual states primarily regulate insurance companies doing business in those states. There is no federal regulatory agency having oversight over insurance companies and, in fact, insurance companies are given some anti-trust protections by the federal McCarran Act. In North Carolina, insurance companies are regulated by the Commissioner of Insurance, which is an elected position.

Regulation by the Commissioner of Insurance is somewhat limited. The primary functions of the Commissioner's office are making sure that each company operating in this state is financially sound, so that it will have the financial ability to meet its obligations to pay claims, and to determine whether rate, or premium, increases in property and casualty insurance are justified.

If an insurance company doing business in North Carolina fails to conduct its affairs in a financially sound manner, the Commissioner's office can prohibit the company from conducting business in this state or can shut it down. If an insurance company cannot meet its financial obligations to pay claims, the state maintains a guaranty fund, which is funded by an assessment levied against every insurance company doing business in North Carolina.

When automobile insurance companies want to increase premium rates, an industry group called the North Carolina Rate Bureau makes a proposal for the increase. The Commissioner of Insurance then holds hearings and investigates to make sure the increase is justified by loss experience and then issues a ruling either granting some or all of the requested increase, or denying it. The companies can, if they choose, then put the increase into effect, anyway, while the dispute with the Commissioner is appealed to the appellate courts. If the courts support the Commissioner, the companies must pay back the excess money collected.

Insurance companies are allowed to make a regulated profit in this manner.

Other duties of the Commissioner include reviewing and approving policy forms used by insurance companies.

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Why do I need Insurance?
Usually, insurance is purchased on a voluntary basis. There are some situations, however, in which the law requires certain kinds of insurance, or in which insurance may be required as a condition of a legal or contractual obligation.

Automobile Liability Insurance is required by law. Each motor vehicle in this state is supposed to have liability coverage providing bodily injury coverage of at least $30,000 per person injured in a collision and $50,000 per accident, and $15,000 in property damage. Any coverage purchased in excess of these minimums is voluntary. Automobile liability insurance covers your legal liability, up to these coverage limits, which could arise if you injure another person, or cause damage to another person's property, with your automobile. This coverage also pays the cost of hiring a lawyer to defend you if you are sued.

If you purchase other coverages as a part of your auto liability policy, those coverages are voluntary. This includes comprehensive coverage, medical payments coverage, and uninsured or underinsured motorists coverage (which by law must be offered, but need not be purchased). If you borrow the money to buy your vehicle, the lender may require you to purchase some of these coverages, however.

Unlike auto liability insurance, there is no law which requires a homeowner to purchase Homeowner's Insurance. However, if you borrow money to buy your house, the lender will require you to buy insurance to protect it against loss in the event of damage to or destruction of your house. This is to make sure the borrowed money is repaid. The lender will be identified as a loss payee on the policy.

Businesses which employ three or more people are required by law to purchase Worker's Compensation Insurance for the benefit of employees injured by accident during the course and scope of the employment.

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Does an employer have to provide medical, life and similar insuarnce coverages for employees?
While the law generally does not require employers to provide this type of coverage, it is fairly common for them to do so as an "employee benefit." Sometimes, as a condition of doing business with certain governmental agencies, businesses may be contractually required to furnish this type of insurance.

Recent legislation affords some protection for people who leave one job and go to another. Federal COBRA laws allow the employee to continue his or her previous insurance coverage for a period of time by continuing to pay the premium for the coverage. Too, an employee who leaves a job in which he or she has health insurance for another employer, may not be denied coverage because of pre-existing condition provided that employee had insurance coverage at his or her previous job.

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Are there limitations on insurance company business practices?
State insurance laws impose many requirements and limitations on the way insurance companies conduct their marketing, underwriting (determining which policy holders or risks to accept or reject for coverage) and rate making activities. In some instances, there are restrictions on how or why an insurance company may cancel or discontinue coverage once a policy has been issued. "Consumer" type insurance is more heavily regulated than business or commercial insurance, since it is assumed that business people are astute enough to protect themselves in dealing with insurance companies. Some of these restrictions and limitations are discussed below.

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Can an Insurance Company refuse to sell me insurance for any reason it chooses?
It is illegal to refuse to sell insurance to someone because of the person's race, skin color, sex, religion, national origin, ancestry or marital status. Because insurance companies proved adept at getting around these restrictions, there are some regulations which prohibit consideration of certain things when passing on an insurance application. For example, the use of zip codes was used to identify ethnic neighborhoods and persons in those neighborhoods were either denied coverage or charged an excessive premium. When this practice was discovered, it was barred, either by the courts or by the Commissioner's office.

Beyond these prohibited classifications, insurance underwriting decisions generally must be based on reasons that are related in some way to the risk to be insured. For example, no company would be required to issue a life insurance policy to an applicant who was already diagnosed with a terminal illness. If you are denied insurance for which you have applied, you are entitled to be informed of the reasons for any such refusal.

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Are there limitations on what an Insurance Company can charge for insurance?
Premiums for automobile liability insurance are highly regulated, as described above. The rates and rating factors for most other forms of insurance usually must be filed with the Commissioner of Insurance.

For other types of policies, insurance companies have a range of premium levels that may be charged based on various factors that are considered at the time the application is made. Even a regulated rate, such as automobile liability insurance, may vary depending on the driver's age, experience, number of miles typically driven, proposed use of the vehicle, and driving record. Life insurance premiums may vary depending on the age and health condition of the applicant.

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Can an Insurance Company cancel the policy for any reason it chooses?
Usually, once a policy is issued, as long as the premiums are paid on time the company cannot cancel the policy except for reasons specified in the policy itself. Insurance regulations usually limit what a company can include in the "cancellation" provisions of its policies. Typically, policies will be subject to cancellation only for failure to make required premium payments or for some type of serious misrepresentation or fraud by the insured.

Most liability policies are issued for a specific period of time, called the term, usually six months or one year. Insurance companies can decide to discontinue, or non-renew, these policies at the end of the policy term. This is not the same as cancellation, however.

If an insurance company wants to cancel a policy, it must comply with regulations and laws which require it to give timely notice of cancellation to the insured.

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Can I cancel my policy at any time and will there be a penalty?
As a general rule a policy holder may elect to cancel an insurance policy at any time by giving notice to the insurance company. In some cases, you may be required to turn in the policy or sign a "policy release" form and, of course, you are responsible for payment of any premium earned up to the date of cancellation.

Some insurance policies have a contractual penalty for early cancellation. Many life insurance policies and annuities impose "surrender charges" if they are canceled before they have been in effect a certain period of time. A policy must clearly describe any applicable cancellation penalties or surrender charges.

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If I miss a premium payment and get cancellation notice, is there anything I can do to keep the policy?
For property and liability insurance, a cancellation notice usually must be sent to the insured several days (usually 30) before the cut-off date. The notice period will be stated in the policy and for automobile liability insurance the notice period is set by law. If you catch up the payments of premiums before the effective date of cancellation you should be able to retain your coverage, at least through the end of the applicable term.

Life, health and disability insurance policies usually contain a "grace period" of as much as 30 days after a premium payment is due before coverage can be terminated. If payment is not made during this grace period, however, these types of coverages may terminate retroactively to the date the premium payment was due without any further cancellation notice from the company.

Some companies may agree to reinstate coverage if you pay all past due premiums and if you certify that you are not aware of any losses which occurred since the cancellation date. This is discretionary and the company does not have to reinstate coverage once it has been cancelled.

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What happens if there is a claim?
Both insurance companies and their insureds have contractual and legal obligations to each other which must be understood and performed to ensure the timely and satisfactory resolution of claims.

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What the insured must do if there is a claim.
Every insurance policy specifies certain duties that an insured must perform after a loss has occurred. The exact duties may vary from company to company, and will be different for property damage claims and liability claims. These duties are usually found in that part of the policy labeled Conditions. The failure of the insured to perform one or more of these duties may relieve the insurance company of its obligation to pay the claim.

Nearly every insurance policy requires the insured to report the claim or give prompt notice of any loss. This notice includes basic information about the loss, including how the loss occurred, what property was damages, whether anyone was injured, etc. If the insured is the one suffering the property loss, he or she will be required to protect the property from further damage. If there is a theft loss, policies often require that the police be notified. If there is a liability claim against you, you must promptly send the company any correspondence or suit papers you receive. For a life insurance claim, it may be necessary to provide a death certificate. Almost all property and liability policies have a general requirement that the insured cooperate with the insurance company in the investigation, settlement or defense of the claim. "Cooperation" does not mean that you are required to violate the law or to lie about what happened.

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What happens if I am sued?
The liability insurance policy provides that the company will provide a defense for you if you are sued and if you have met all of your obligations under the policy. The company will choose and hire a lawyer to represent you and will pay the lawyer's fee. Despite this, the lawyer, once hired, owes his or her primary loyalty and obligation to you, not to the insurance carrier, in the event your interests and those of the company are in conflict. You also have the right to hire your own lawyer, at your expense, to assist in the defense of the case. If you do so, however, the lawyer hired by the insurance company still has the primary responsibility for your defense.

The insurance company usually has the right to settle the case, even if you object. However, professional liability policies (for medical or legal malpractice) may contain a provision which provides for settlement only with the consent of the insured. This does not mean that the insured can force a settlement, only that there can be no settlement if the insured objects.

Sometimes, a legal complaint may state several different types of claims, some of which are covered and some of which may not be covered. If any of the claims could be covered, the company is required to provide a defense, but it may not be required to pay damages assessed against you for some of the claims. In that case, or if there is a dispute over coverage, a reservation of rights letter gives you notice that even though the company is proceeding to provide a defense for you, depending on what happens certain losses may not be covered by the terms of the policy. This allows the company to deny coverage at a later date based on the terms of the policy.

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What if the company won't pay the claim?
Insurance companies sometimes refuse to pay, or deny a claim submitted by a policy holder or by someone who has a claim against the policy holder.

The claim may be denied because the company contends there is no coverage provided for the claim or because there is a legal defense to the claim, either based on the underlying facts of the claim or on the language of the policy.

The insurance company is not always right, and if your claim is denied you should consult a qualified lawyer for advice.

Remember, an insurance policy is a contract between the company and the insured. If an insurance company wrongfully refuses to pay a just claim, that is a breach of contract and the insured can pursue all remedies allowed by law. This usually involves filing a lawsuit against the insurance company. If successful, the insured will be able to recover his or her damages, which at least will be what the insurance company should have paid in the first place. Depending on the circumstances of a particular case, the insurance company may have to pay other expenses its insured incurred because of the denial of the claim, as well as the costs of the lawsuit.

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