Six Required Specifications of an Insurance Policy

California law requires that every valid insurance policy contain certain essential specifications. These specifications ensure that the contract is legally enforceable, transparent, and clear to all parties involved. Under CIC §381, six items must be included:

1. The Parties to the Contract

• The policy must clearly identify who is entering into the agreement:

  • The insurer (the company providing coverage).
  • The insured (the individual or entity purchasing coverage).

• Example: A homeowner’s insurance policy will list ABC Insurance Company as the insurer and John Smith as the insured.

2. The Property or Life Insured

• The policy must describe what is being insured:
  • In property insurance → a house, vehicle, or business premises.
  • In life or health insurance → the life or health of a named individual.
• This prevents disputes over whether the subject of insurance was properly covered.

3. The Insured’s Interest in the Property (if not the absolute owner)

• If the insured does not own the property outright, the policy must specify the nature of their interest.

• Example:

  • A person leasing a building may insure their leasehold interest.
  • A mortgage lender may be named as a loss payee because they have a financial interest in the property.

• This prevents policies from being issued where no insurable interest exists, which would otherwise be considered wagering and against public policy.

4. The Risks Insured Against

• The policy must specify exactly which perils or events are covered.
• Examples:
  • In Property & Casualty insurance–Fire, theft, or liability claims.
  • In Life & Health insurance–Death, sickness or accidental injury.
• Equally important, insurers often list exclusions (perils not covered). Without this detail, disputes would arise over what losses qualify for coverage.

5. The Period of Insurance Coverage

• The contract must define the timeframe during which coverage applies.
• Example: A six-month auto policy effective from January 1, 2025, to June 30, 2025.
• Coverage is not retroactive, nor does it extend beyond the stated term unless renewed.

6. The Premium, or the Basis for Calculating It

• The policy must specify either:
  • The exact premium amount, or
  • The method of calculating the premium (such as payroll-based calculations for workers’ compensation).
• This ensures the insured knows their financial obligation and the insurer has a legal basis for collecting payment.

These six specifications ensure clarity, enforceability, and fairness in insurance contracts. If any are missing, the policy could be considered defective or unenforceable in California. They help prevent fraud, reduce ambiguity, and ensure that both insurer and insured understand the scope of their agreement.

Example to summarize:
A valid California auto policy issued by ABC Insurance Company to Jane D must clearly state:

1. ABC Insurance Company (insurer) and Jane Doe (insured).
2. Coverage for Jane’s 2019 Toyota Camry.
3. Jane’s ownership interest (full legal owner).
4. Risks insured against (collision, liability, theft, etc.).
5. Policy period (July 1, 2025 – December 31, 2025).
6. Premium amount ($1,200) or rating basis.