How to Understand an Insurance Policy

Most people would rather go to the dentist than try to read an insurance policy. Like most things that seem intimidating at first, though, when you break it down, it makes a lot more sense.

There are four basic parts to every insurance policy:

•   Declarations

•   Insuring agreement

•   Exclusions

•   Conditions

Declarations: The declarations introduce your coverage. They identify the insurer, the insured and policy number. They also identify the properties or risks the policy covers, and for how long (the policy period). They outline the financial considerations of the contract, including premiums you will pay, limits and deductibles.

Here are some of the things you can find out about your coverage in the Declarations section. Check and make sure they are accurate:

•   Check that the name of the insured matches the entity’s legal name, spelled correctly.

•   Check that the policy lists the addresses of all the business premises you want to cover (for a business property policy).

•   For an auto policy, verify information on make, model and VIN numbers for covered vehicles.

•   For a liability policy, verify the declarations accurately describe the type of coverage you want.

•   Check the policy start (inception) and termination dates. This is your coverage period. If you are replacing an existing policy, will this create any coverage gaps? Some claims-made liability policies provide coverage for accidents that occur before the current policy term, the retroactive period. Check the retroactive date — the date on a renewal claims-made liability policy should match the date on your first policy, otherwise you will have a coverage gap.

•   Policy limits are the most the insurer will pay under the policy. Some policies also have separate, lower sublimits for specific types of claims. Will these limits provide enough coverage?

•   The declarations page will also list the premiums you pay, along with any deductibles you will have to pay before the insurer begins to pay on a claim. To lower your premiums, can you afford higher deductibles?

•   Some policies include separate schedules, or itemized lists of covered property. They might also include endorsements, which are separate documents that modify terms of coverage under a policy. The declarations should list these — check that they are correct.

Insuring agreement: This section summarizes the insurer’s agreement to pay covered claims. For a property policy, it will state the property covered and types of perils, or causes of loss, the policy covers. In a liability policy, the insuring agreement describes the types of activities covered. For a commercial general liability policy, the insurer agrees to any money the insured is legally obligated to pay for bodily injury or property damage claims covered by the policy. The insurer also agrees to provide the insured’s legal defense for liability claims that might be covered by the policy.

Action item: For a property policy, determine whether you have a “named perils” or “all-risk” policy. A named perils policy will list the specific perils that the policy covers. Any peril not named is not covered. The so-called “all-risk” policy offers broader coverage, covering losses caused by any peril, except for those specifically excluded in the policy. If you have a named perils policy, do you have any significant risk exposures that are not covered?

Exclusions: Exclusions limit your coverage by stating the types of activities or losses the policy will not cover.

Action item: To avoid significant coverage gaps, list the exclusions included in all your liability policies. Most general liability policies exclude liability for pollution and design error, among other things. If you need coverage for these exposures, you will need to buy separate, specialized insurance.

Most businesses have a second layer of liability protection through an umbrella or excess policy. This pays claims that exceed the limits of the primary liability policies. Often an umbrella policy will provide broader coverage (that is, cover more perils) than your primary policies. If not, and you have significant risk exposures excluded in your primary policies, please contact us so we can tailor a coverage solution for you.

Conditions: The conditions describe the obligations of each party to the contract. Conditions can appear in the basic policy, the standard form and (if you have them) in your policy endorsements.

Conditions include the policy’s cancellation provision. They also describe how the insurer will proceed if other coverage applies to a loss, and reserve the insurer’s right to subrogate a claim, or seek recovery from another party after it has paid a claim on your behalf.

The conditions also outline your obligations to the insurer. They spell out when and how you must notify the insurer of an accident or claim that might be covered by a liability policy, your obligation to protect covered property after a loss, and your obligation to cooperate during the company’s investigation or defense of a liability lawsuit.

Action items: Read policy conditions carefully, because failure to fulfill your obligations to the insurer could nullify your coverage!

To ensure you have time to find other coverage, look for a cancellation provision that requires the insurer to provide at least 30 days’ notice before cancelling your policy for reasons other than non-payment. For difficult to place coverage, you may want as many as 90 days’ notice.

If you need help reviewing a policy or understanding policy provisions, please contact us.