Understanding Insurance Policies and Small Print

We’re warned to watch out for the small print in every contract and legal document we sign, and this is also true for insurance because of a unique factor in the way it works.

We need to do all we can to ensure we are covered and as it’s a simple fact that insurance means you give a company your money (premium) and then they pay out if you are covered and anything goes wrong, so it’s best you understand the small print. To help you do just that, it’s worth learning some of the common legal and procedural principles behind the terms and conditions of insurance policies and understanding why they exist.

Excess

Most insurance policies have an excess clause, which means that you are responsible for paying a certain amount of any claim. The most important thing to watch out for here is that the excess is a fixed amount, not a proportion. For example, if your excess is £100 and your claim totals £300, the insurer pays you £200 of the claim. If your claim totals £120, the insurer only pays £20. A high excess can cut premium costs but can make cover for some risks or items less valuable to you. If you receive a cash payout, the excess is usually simply deducted. However, if an insurer replaces items instead, you may have to actually hand over the excess amount.

Acting in good faith

Most policies require both parties to act “in good faith”, which is a legal term that broadly means acting both honestly and reasonably. The main point to watch out for here is that you must tell the insurer all “material facts”. This means anything that could affect either their decision to insure you, or the premium they charge. You should tell your insurer about such facts, even if they don’t specifically ask about it.

Proportionality

This is a term that you should be aware of. Policies usually require you to cover the full costs of the insured risk. An example of this could be the value of all your property if you have home insurance. You might think that if all your property was worth £60,000 and you save cash by taking out a policy for £40,000. But this isn’t simply a gamble if you lose everything. It could affect any claim you make. In this example, if you are burgled and make a claim for £3,000, the insurer would have the right to pay out the claim proportionally, and thus only pay £2,000.

Indemnity, subrogation and contribution

These are three principles than can affect the way your claim is handled. Indemnity means a payout should only restore you to your original position and you shouldn’t be better off as the result of it. Subrogation means once the insurer makes a payout, they can exercise your rights when it comes to recovering losses, for example suing the person responsible for damage. Contribution means that if two policies cover the same risk (for example a mobile phone covered by a specialist phone policy and a home contents policy), the insurer that you claim from has the right to pursue the other insurer or insurers to get back some of the money.

Act of God/Force Majeure

These both refer to events that are particularly unusual such as war, terrorism or extreme natural disasters. The terms are carried over from general contract law where they mean one party isn’t necessarily forced to live up to their side of their bargain if they are prevented from doing so by acts outside their control. Though you may see these terms in an insurance policy, they have limited effect: for example, a household policy insurer usually wouldn’t be allowed to refuse to pay for damage from a hurricane or extreme flood as these are inherently part of the covered risks.

The important thing is to read the small print carefully and make sure you know exactly what is and is not covered by your insurances.

*Note: Insure4Retirement has issued this guide for information purposes only regarding what could be available on a home insurance product. No advice is being offered as to the suitability of any policy to a person’s own personal circumstances.