• The construction of your home. An insurance company willconsider whether your home is constructed of wood, brick, concrete block, or other material. The construction of your home affects how easily the structure can catch fire and how likely the structure will collapse because of fire or extreme weather.
• The value of your home. A $500,000 home represents a greater loss exposure than a $100,000 home because, if damage occurs that renders the home a total loss, the insurance company will be required to pay out a greater amount to replace the home.
• The presence of sprinkler systems or other fire-suppressing devices. A fire suppressant system can decrease the amount of damage sustained by a home if a fire occurs and can prevent the home from being rendered a total loss.
• Proximity to a fire station. The closer your home is to a fire station, the quicker firefighters can respond if a fire breaks out in your home. This can potentially reduce the amount of fire-related damage your home could sustain.
• Proximity to a fire hydrant. In urban and suburban areas, some insurers use this factor to determine how easily firefighters can extinguish a fire in your home.
• Presence of a swimming pool or hot tub. Swimming pools
present a risk of injury or death to household occupants, guests,
and trespassers. The presence of a swimming pool on your
property significantly increases your personal liability for whichyour insurance company would be financially responsible. The
presence of a hot tub on your property also poses the risk of fire
resulting from faulty wiring or improper electrical grounding.
• Presence of fences or other access control. This is particularly
important if a swimming pool, hot tub, large play set, or other
potentially dangerous item or fixture is present on your property.
Your insurance agent may make periodic visits to your property
to ensure gates and other access controls are properly secured.
• Your age and gender. Statistically, young and elderly drivers pose
a greater risk for automobile accidents than middle-aged drivers.
Likewise, male drivers pose a greater accident risk than female
drivers. A few jurisdictions, such as the Commonwealth of
Pennsylvania and the State of California, have passed laws that
restrict or eliminate an insurer's ability to determine auto
insurance premiums based on driver gender.
• Your driving record. The number and frequency of traffic
violations and accidents can help predict your future driving
• Where your vehicle is parked at night. This factor is based on the
idea that most drivers do not venture far from home on a daily
basis. Different locations represent different risks for automobile
accidents, thefts, and vandalism. Some states heavily regulate
the territory classifications used by insurers, helping to protect
you from being grouped in a rating territory that does not
accurately reflect your risks.• How much you drive. Vehicles driven only on Sunday afternoons
represent a lower accident risk than vehicles driven every day.
Some insurers are beginning to rely on equipment installed in a
vehicle, similar to a black box on a commercial jet, to verify the
frequency and distance a vehicle has been driven over a policy
• The age of your vehicle. Because the value of a vehicle
depreciates over time, an older vehicle is less expensive to
insure than a new vehicle. This means the maximum amount an
insurer would be required to pay out in the event of a total loss
(the occurrence of damage that exceeds the value of a vehicle)
would be less for a fiveyear-old vehicle than for a brand-new
• The type of vehicle you drive. Many insurers weigh the potential
for damage to a vehicle and its occupants against the potential
damage the vehicle is likely to cause to other vehicles and their
occupants. For example, a Hyundai Accent carries a relatively
low likelihood of massive damage to another vehicle but has a
high likelihood of being damaged in an accident. It also provides
a comparatively low level of personal protection, increasing the
risk of bodily injury to its occupants.
Conversely, a Hummer H2 has the potential to withstand a
collision with low to moderate damage and provides a relatively
high degree of physical safety for its occupants; however, if a
collision occurs, it is likely this vehicle will cause substantial
damage to another vehicle and its occupants.
Life Insurance• Your age. Insurance companies realize they are more likely to
pay life insurance claims on older applicants than younger ones.
Consequently, an insurance company will charge higher
premiums on a 55-year-old policyholder than one who is 20
years old. Insurers may also place restrictions on the maximum
age of an applicant at the time a life insurance policy is written.
• Your gender. Statistically, males are more likely to have shorter
life spans and engage in risky activities than female
policyholders. This increases the probability an insurance
company will be required to pay on a life insurance policy for a
male than for a female.
• Your health and medical history. Insurance companies may
require applicants to submit to a physical examination, which
may include collection of blood or urine samples, when
evaluating an applicant for insurability. In addition, an insurer
may review your medical history for indications of recurring or
chronic disease. The presence of a disease or condition may
cause your life insurance application to be declined or be rated
at a higher premium level.
• Your tobacco use. Higher mortality rates are associated with
tobacco users than nonusers. Insurance companies consider
any type of tobacco use when determining premium rates,
including cigarettes, cigars, and chewing tobacco.
• Your age. Insurers can use your age to determine your eligibility
for health insurance coverage, as well as your policy premiums,if you are accepted.
• Medications you are currently taking. An insurance company can
use information about the medications you are currently taking to
gain an understanding of health issues you may currently deal
with or have the potential to incur in the future. This can affect
your health insurance premiums or even your acceptability for
• Existing health issues. If you have an existing health condition or
disease, an insurance company may use this when determining
your health insurance premiums or acceptability. This is because
the insurer knows that, if you have an existing health condition, it
will likely have to pay for additional medications or treatment for
the condition. Although insurance companies assume the risk
that its policyholders will develop conditions that will require
treatment, an existing condition all but guarantees the insurer will
have to pay.
• Your tobacco use. People who use tobacco in any form have a
significantly higher likelihood of developing certain conditions,
such as heart disease, hypertension, and cancer, than those
who do not use tobacco. Thus, an insurer can consider your
tobacco use as a predictor of various health problems.
Another way insurance companies manage the risks they assume is
through the language contained in insurance policies. An insurance
policy is a contract between you and the insurance company thatdetails your obligations as a policyholder and the insurance
company's obligations as the bearer of your personal financial risks.
In legal terms, a personal insurance policy is a contract of adhesion.
This means one party (in this case, the insurance company) drafts
the language of the contract, and the other party (you, as a
policyholder) accepts or rejects the terms of the contract. If you
accept the terms, a policy can be issued to you, and both you and
your insurer are bound by the terms of the contract. If you reject the
terms, no policy can be issued, and you will need to seek insurance
through another company.
In a contract of adhesion, you have no bargaining power to change
the terms of the contract. The insurance company will not be willing to
change the terms to meet your individual needs.
You may have accepted a contract of adhesion at least once in your
life. If you purchase or lease an automobile, you signed a contract of
adhesion provided by the company selling you the car and maybe
another one provided by the company financing the loan or lease on
your automobile. If you have a cell phone, you signed a contract of
adhesion drafted by the company providing your cell phone service.
Although it may seem unfair that you have no opportunity to negotiate
the terms of your contract with an insurance company, a contract of
adhesion benefits you by allowing an insurer to manage a large
amount of risks while keeping premium costs down. The legal
resources that an insurance company would require to provide
customized contracts for each policyholder would prevent any
insurance carrier from being able to provide coverage at an
acceptable price.The following are the main parts of an insurance policy that an insurer
uses to manage the risks it assumes.
This section provides an overview of the contract. It states your rights
and obligations as a policyholder and what the insurance company
will provide in the event of a loss.
You may not realize you have obligations under the policy, but these
obligations help your insurance company provide adequate coverage
while managing premium costs. Typical policyholder obligations
• Cooperating with law enforcement officials in the event of a loss
• Notifying your insurance company of any relevant changes in
your personal circumstances, such as moving to a new address,
adding a room to your home, getting married or divorced, or
replacing an automobile.
• Taking steps to prevent further damage to your property if a loss
occurs. This may involve covering a broken car window with
plastic to prevent rain damage to your car's interior or covering a
portion of a damaged roof to prevent leakage.
• Cooperating with your insurance company during a claim
• Attending hearings and trials involving a damage or loss.• Notifying your insurance company of any payments for damage
you receive directly from the person who caused the damage,
that person's insurance company, or other person or business.
If you were not bound by contractual obligations as a policyholder, the
insurance company would not be able to effectively provide coverage
for your losses. For example, if your car's window was broken but you
could leave the car parked on the street with the window missing, you
might expect the insurance company to not only pay for the
replacement of the window, but also for water damage to your
upholstery, theft of the contents of your vehicle, or theft of the vehicle
Likewise, if you could receive payments from a person who caused
damage to your personal property without notifying the insurer, you
could end up receiving double payment for your loss. This goes
against the concept of indemnification, because you would be in a
better position than if the loss or damage had not occurred.
Your insurance company also has certain obligations that are stated
in your personal insurance policy. These may include:
• Payment of valid claims for loss or damage, up to the chosen
policy limits. In some states, insurers are required to issue
payment for claims within a specified number of days.
• Representing you at trials and hearings relevant to a covered
loss, even after your policy limits have been reached.
• Protecting your interests as a policyholder.Conditions
Policy conditions elaborate on the insuring agreement and provide
further information about what you and your insurance company are
expected to do under the insurance policy. These conditions may
address specific facets of your insurance agreement, such as:
• How claims will be paid if you have two or more policies covering
the same loss.
• How your claim will be handled if you and your insurer disagree
about the value of a loss or damage.
• Under what circumstances your insurance company may recover
amounts it has paid to you under the policy, either from you, the
person that caused the injury or damage, or the insurance
company providing coverage for that person.
• The jurisdiction under which a lawsuit must be filed.
• How traveling to another state or jurisdiction will affect the
amounts you can recover under your policy.
• Whether coverage will be provided for damage or losses that
occur while you are in another country.
Although personal insurance is designed to provide you with
compensation for legitimate losses, it cannot provide coverage in
every circumstance. Some circumstances cannot be accuratelyquantified by your insurance company, which means the insurer has
no way of accounting for these circumstances when determining
policy premiums. Other circumstances are outside the scope of what
an insurance policy is intended to provide.
Policy exclusions specifically state types of losses that will not be
covered under the policy. Here are some examples of circumstances
and types of losses that may be excluded under an insurance policy:
• Damage to a car that occurs while you are committing a felony.
• Damage to your home as a result of war, riot, or civil unrest.
• Death that is a result of an act of suicide. States limit the amount
of time a policy may exclude suicide deaths.
• Physical injury that you incur while riding on top of a car.
• Damage to your home or car that is caused by pollution.
• Damage caused by a person acting in his or her capacity as a