An insurance policy is a legal contract between an insurer (the insurance company) and an insured (the policyholder) that outlines the terms and conditions of the insurance coverage. This document specifies the type of coverage, policy limits, premiums, deductibles, exclusions, and obligations of both parties.
For example, a homeowner’s insurance policy may cover damages caused by fire or theft but exclude damages from floods or earthquakes. Similarly, an auto insurance policy might cover collisions and liability but exclude routine maintenance costs.
The insurance policy is the foundational document that governs the relationship between the insurer and the insured, ensuring clarity and mutual understanding.
An insurance policy is important because it defines the scope of protection offered by the insurer, providing clarity about what is and isn’t covered. It serves as a reference point for resolving disputes, determining claim eligibility, and managing expectations between the parties.
For policyholders, the insurance policy is essential for financial planning and risk management. For insurers, it establishes a framework for underwriting, risk assessment, and claims handling.
Understanding the terms of an insurance policy is crucial for both parties to avoid misunderstandings and ensure compliance with contractual obligations.
