Question

Why do insurance companies need to identify both conditions and exclusions in an insurance policy? Why should business people purchasing insurance make sure they clearly understand the conditions and exclusions?

Answer 1

To better answer this question, we must first understand the meaning of an insurance policy-
An insurance policy is a contract between the insurance company and the person buying the insurance (policy holder) such that the insurance company will pay the sum assured to the policy holder in case one of an event/loss for which the insurance policy was bought and in turn, the policy holder pays a premium.

As a result, it becomes critical for the insurance company to identify both conditions and exclusions. An insurance is a legal contract and every legal contract is subject to some terms and conditions. Conditions describe the scope of the insurance policy, mentioning if and when the claim amount will be paid to the policy holder. It is in the interest of the insurance company to specify clearly state the conditions of the insurance policy as this can be used as a valid reason to reject claims that violate the conditions initially specified. This helps prevent fraudulent activities. Exclusions specify what all is not included in the scope of the insurance policy. With the help of exclusions, insurance companies make it very clear what all the insurance company will not pay for. Additionally, exclusions help limit the loss exposure of the insurance company and also keep the costs (premiums) low for the person buying the insurance policy.

It is very important for business people purchasing insurance to make sure they clearly understand the conditions and exclusions. Each insurance policy is tailored to cater to a specific need and often targets a particular customer segment. Understanding the conditions will help the business person decide whether or not the insurance policy meets his/her requirements and exclusions help specify the areas not covered by the insurance policy. If a person purchases an insurance policy without understanding the conditions and exclusions, the likelihood of that the claim might be rejected by the insurance company increases significantly. Also, customers will not feel cheated if a claim is rejected as the scope of work was clearly defined before purchasing the insurance policy. Also, the person will be more aware of any hidden clauses, payments or deductions which are not widely advertised. All this will help the person make an informed decision and prevents being cheated by the insurance policy by false rejection of claims.