Types of insurance

What is an insurance policy?

An insurance policy is a contract that establishes a binding legal relationship that is regulated by both the common law and legislation. In other words, in some situations the law has been derived from precedents established in courts; in other situations the contract is specifically regulated by laws passed by Parliament. There is also regulation by independent statutory authorities.

The insurance company is known as the "insurer"; the person who holds the policy is known as the "insured".

Consumer insurance is usually either General insurance or Life insurance.

Transfer of risk

The basis for insurance is "transfer of risk".

This means that the insurer agrees to compensate you if you suffer a loss. Without the insurance you would have to pay for that loss yourself. Obviously this contract is made on the basis that the insurance company calculates the risk that you, or the total number of people buying insurance, will cost more in payouts than what is received in premiums. This is determined by the use of statistics and the information you disclose on your application for insurance.

General insurance

This includes:

· Home contents. It can either be "defined event" i.e. the policy covers loss or damage from a list of "defined" events, e.g. storm or fire; or "accidental loss or damage" i.e. all accidental loss with some exclusions.

· Motor vehicle. It can either be "comprehensive" i.e. it covers any damage to your car as well as damage to the other car or another person's property; "third party property" i.e. it covers damage caused by your car to another person's property. This type of insurance will not cover you for the cost of repairs to your own car; "third party fire and theft” i.e. it covers damage partly for damage caused by your car to another person's property, and restricted cover for damage to your car cause by theft or fire.

· Income protection. With this type of insurance the insurer agrees to pay you a specified amount of money, usually in monthly payments, in the event that you become disabled and unable to work. Along the same lines you an purchase "trauma insurance" to cover a medical trauma such as a heart attack.

· Public liability e.g. a person injures themselves on your property. However, this does not cover people who work in your home, such as cleaners or contractors. States and Territories now have laws which limit an injured person’s common law rights to sue for negligence, place thresholds and caps on damages for pain and suffering, and limit the payouts for economic losses.

· Personal accident.

· Travel. Make sure the policy and the underwriter will be recognised in the countries in which you travel, otherwise you may face difficulties in receiving medical assistance.

· Life insurance. This is a contract where the insurance company is bound to pay an agreed sum on the death of the person who is insured.

Some life insurance policies are more in the nature of an investment product, where the company takes your premiums and invests them to add value to the policy.

Using a broker
Under the law an insurance broker must be licensed and registered by the Australian Securities Insurance Commission (ASIC). Their conduct is regulated by ASIC and they must also act in accordance with their Australian Financial Services Licence. This establishes standards that ensure:

· their professional identity is truthful;

· they do not try to pressure you into a policy you don't want;

· they follow certain accounting practices that protect your premiums;

· disputes will be handled in an appropriate manner.

To maintain registration, brokers must:

· have accounts audited and provided to ASIC and demonstrate their businesses are financially sound;

· carry professional indemnity cover to protect clients who suffers financial loss due to the broker's negligence;

· disclose all fees and if requested, any commissions received;

· subscribe to a government approved, external complaints handling facility.

For other requirements or queries contact ASIC 1300 300 630 or email infoline@asic.gov.au.

Types of cover

Make sure you understand the types of cover that you will receive from the policy. For instance, home insurance can either be:

· defined event i.e. the policy covers loss or damage from a list of "defined" events, e.g. storm or fire;

· accidental loss or damage i.e. all accidental loss with some exclusions.

Just because a defined event is covered in your policy is not a guarantee that you will be covered no matter how (or why) the event took place. This partly depends on the way the events are described in the policy, and any exclusions that are made in the policy regarding the circumstances of the event. Therefore it is always important to carefully read the policy.

Accidental loss or damage policies cover all accidental losses, but it will nevertheless be subject to stated exclusions.

Policy documents

Usually you will find two different parts to your insurance policy:

· the “terms and conditions” (often a brochure) that may not be specific to you;

· the policy “schedule”, which includes your personal details, a description of the insured assets, any optional details and any restrictions.

Be especially vigilant for restrictions or limitations in the policy. It is best to read the “terms and conditions” and the policy together, and treat them as one document.

LAW FOR YOU

Read this: This fact sheet is intended to be general information about the law in Australia. It is not a substitute for legal or other professional advice. Lawscape Communications Pty Ltd, Fairfax Interactive Pty Ltd or MoneyManager does not accept responsibility for loss to any person, who either acts or does not act because of this fact sheet.

Last Updated – March 2007

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