When people purchase insurance coverage they sign an agreement with the insurer who may be represented by an insurance agent or broker. The agreement in form of a policy states the insurable risks covered and the exclusions. It is important to read the exclusions carefully to understand what the insurer will not cover. To be fully covered, the policyholder can request for endorsements on the policy or take additional insurance to cover the exclusions.
There are various insurable risks and the policyholders buy policy covers of what they are most vulnerable to, in their area. When you own a car you need to purchase auto or car insurance to cover you, your passengers and third parties against loss due to theft, damage and personal injury. If you are a homeowner you will need to buy a home insurance to protect you and your home against fire, theft, smoke, damage and burglary. If you bought the home using a mortgage loan, the bank will require you to buy mortgage insurance. If you live in an area prone to floods or earthquakes you will buy flood or earthquake insurance. Farmers buy crop insurance to protect their crops against losses caused by crop failure.
The policyholder pays a premium to the insurance company for the coverage and the insurance company agrees to pay benefits to the insured for losses suffered and for damages caused by the insurable risks stated in the policy. The insured will make a claim to the insurer for compensation directly or file a claim through an independent adjuster. When it is a road accident, the insurer should call the agent and notify him of the accident as soon as possible before the set deadline.
The insurance company will engage the services of adjusters and appraisers to verify if the insurer has liability to pay. When the claim is approved the insurance company will compensate the insured at either
- The Actual Cash Value which is the replacement cost less depreciation of the asset or property or
- Replacement Cost/Value
The actual cash value is usually lower than the replacement value because an old or used asset can be bought. Replacement value is the actual amount that a new or like kind asset or structure costs to replace. The stolen or damaged asset or property is replaced with same kind and same quality asset or property as at pre-loss state. The amount compensated is limited to the coverage limit set in the policy.
There are general types of insurance which people buy and these include personal injury insurance, health care and life insurance to protect them against these risks. For life insurance there is no replacement cost/value because a life cannot be replaced. When it is a personal injury the insurer tries as much as possible to replace the financial loss suffered and tries to make life bearable when disability is involved by paying medical treatments and lost wages incurred in the past and income continuation in the future.