A Guide for Understanding Your Insurance Policies Before You Need To Use Them
Whether you are a budding entrepreneur just getting underway with your first venture or a well-established business owner, insurance is a crucial financial investment that can have a major impact on commercial success and longevity. Depending on the nature of your business, you may acquire many different types of insurance coverage, including policies covering commercial general liability, commercial property, cyber liability, automobile liability, employment practices liability, and professional liability.
Regardless of the type of coverage, the value of an insurance policy is diminished if the policyholder does not understand what risks it covers and how its coverage may be restricted. However, many policyholders – particularly those who are fortunate enough to have never needed to make a claim – may have difficulty identifying the key provisions in an insurance policy.
This article provides an overview of some key provisions of a typical insurance policy and provides best practices to gain an understanding of the scope of insurance coverage when it is best to do so – before you need to use it.
1. Declaration Page
The declaration page contains important information about the identity of the named insured, the effective dates of the policy, a summary of the risks insured, the limits of coverage, and any deductible. It will usually be the first page of the policy. As a best practice, always review the declaration page to make sure the information is correct and the coverage is what you intended to purchase. If it is not, consult your insurance agent.
2. Insuring Agreement
The insuring agreement is a statement of what the policy will cover, before application of any exclusions or conditions that narrow the scope of that coverage. The insuring agreement usually appears early in the policy, behind the declaration page but before other portions of the policy that state exclusions, conditions, and definitions. Like the declarations page, review the insuring agreement to make sure the description of coverage is as expected. If it is not, or if you do not understand the insuring agreement, consult your insurance agent.
The coverage provided by the insuring agreement can be limited elsewhere in the policy through exclusions. Exclusions state circumstances in which the policy will not provide coverage, even if the insuring agreement would otherwise provide coverage. One common exclusion in many different types of policies, for example, excludes coverage for damage the policyholder expected or intended to occur. In other words, a policyholder cannot set their house on fire and then make an insurance claim for the resulting damage, because it was expected and intended to occur. However, a policy may state exceptions to some exclusions, which are circumstances stated in the policy that would restore coverage that an exclusion would otherwise limit. Although wading through policy exclusions and exceptions may be intimidating, a careful reading of these provisions is important to understanding the coverage a policy affords. An explanation from an insurance agent or the advice of legal counsel may be helpful to discerning just what a policy should cover after application of exclusions and exceptions.
The coverage provided by the insuring agreement may also be limited through conditions. For example, a policy may contain provisions setting forth how and when a policyholder should provide notice to the insurer of a loss, a claim, or a circumstance that could give rise to a loss or claim. A policy could also state, as a condition, a limitation on the period of time a policyholder has to file a legal action against the insurance carrier if there is a dispute, or the place in which the policyholder should file such action. Understanding and complying with these conditions is a best practice to maximize the chance of resolving claims and avoiding disputes with an insurance carrier about coverage.
An insurance policy will contain many terms that are specifically defined in the policy document. These terms are generally distinguishable in some way from other words appearing in the policy. They may be bolded, for instance, or placed in quotation marks. The definitions for these specific terms are generally set forth in a separate section of the policy. Understanding these definitions, and keeping them in mind when reading the rest of the policy, is crucial. The insurance carrier will apply these definitions in the event of a claim, and a court will apply these definitions as well if a coverage dispute with an insurer needs to be litigated.
6. Endorsements and Riders
A policy may include one or more endorsements or riders that contain language modifying the policy language. These endorsements or riders usually appear at the end of a policy, but they cannot be ignored. Endorsements may change policy definitions, introduce new exclusions, impose new policy conditions, or even add persons or entities as insureds under the policy. Riders may state additional coverage, beyond the insuring agreement, that a policyholder has chosen to purchase. Reviewing an insurance policy without the endorsements and riders may leave out critical information. When reviewing your policies, double check to ensure that you have a complete copy of the policy, including all endorsements and riders.
Although every policyholder hopes to avoid any accident or loss, it is best to be prepared for the unexpected. Reviewing and understanding insurance policies is a necessary and important step to ensuring that you have the coverage you need to protect your business.