Insurance policies differ from one another as to the risk that they cover. In insurance parlance, risk is a likelihood that an event resulting in a financial loss will or will not occur.
The risks covered by different kinds of insurance policies are the primary factor that differentiate them. For example, a homeowner’s insurance policy protects against specified risks related to residential property, and often, the contents within the residence. In contrast, a life insurance policy protects against the risk of death. While it is a certainty that everyone will die at some point, a life insurance policy might be considered a “hedge” against premature death. Therefore, perhaps it is more appropriately called “death insurance.” Disability insurance pays benefits to the policyholder if he or she is unable to work because of an illness or injury by replacing lost income. There are variations and options to all of these kinds of insurance. The variations and options, in turn, correlate with the nature of the risk and the kind of insurance policy involved.
Some include total benefits payable, deductibles, elimination periods and differences.
There are myriad types of insurance policies that cover myriad types of personal and commercial risks. All of them have characteristics unique to the risks, but all also have some common ones. One of the most prominent is the way in which the insurance policy is constructed. For the most part, the sections of each are the same regardless of the risk against which the policy insures. Furthermore, the significance of each section is about the same irrespective of the kind of insurance involved. An understanding of these common characteristics will allow you to read and to better understand any insurance policy.
- The Declarations. The Declarations is usually the first page of the policy that provides substantive information on the nature and extent of the insurance coverage .There may be a cover page that comes first, but that often contains general information about the insurer, the agent or broker that sold the insurance policy and on life insurance policies, the name and gender of the insured and other very basic information. The Declarations identifies who or what is the subject of the insurance. It also states the length of time that the policy is initially in force (the “term” of coverage). Importantly, it broadly summarizes coverage information. The summary relates to the general nature of the insured risk and the amount of insurance provided. The amount refers to policy limits, something that is critical to understanding the policy. Insurance policies are purchased and priced not only in terms of the nature of the risk and the breadth of coverage but also in terms of the dollar amount of coverage. This is also important to understand because it defines the total dollar amount that the insurance company is obliged to pay assuming that premiums have been paid, the loss is a covered one, and the person or entity insured has complied with all other conditions and duties imposed upon him/her/it.
- The Definitions. This section defines words and phrases used throughout the insurance policy. Ordinarily, they are given their plain meaning, but not always. Therefore, when reading the policy, it is important to refer to the definitions section because the insurer may define certain terms in a way that differs from the usual. Also, if you do not know or are uncertain of the meaning of a term used in the policy, you should refer to the policy definitions section to see if is a defined term. For example, a car is not a motorcycle although they are both used as modes of transportation and have motors. Therefore, an auto policy will generally define the term “motor vehicle” to exclude motorcycles.If a term is not defined in the insurance policy, it might be susceptible to dual definitions and therefore, could be considered to be ambiguous. Assuming both definitions are reasonable in the context used, and one would result in a finding that there was coverage and the other would result in no coverage, a court could find that there was coverage. This is because the insurer wrote the policy and could have chosen language and definitions so as to exclude coverage. That is, true ambiguities are generally defined in favor of the insured. Bur remember, this is not legal advice-it is a general, and hopefully, helpful guide to understanding your insurance policies.
- The Policy Coverages (or “Coverage Parts”). This section of an insurance policy states the specific coverages provided. For example, some types of policies cover only property loss or damage (like the collision coverage of an auto policy or the contents coverage of a homeowner’s or renter’s insurance policy). Other policies cover not only property loss or damage but also liability (damage caused to others by the insured’s negligence). Still others cover liability only, such as professional malpractice insurance policies. There are also “package policies” that provide a range of both property and liability protection, These exist in both personal and commercial lines of insurance.
- The Exclusions. This section can be especially tricky. It descrives the limitations on coverage as well as circumstances under which there can be no coverage at all. Usually, a total exclusion of coverage will be based upon how the loss occurred, and sometimes, when. An example is when a life insurance policy states that death by suicide is excluded if it occurs within a stated number of years after the policy is issued.
Sometimes appearing within the Exclusions, and sometimes in their own section of the insurance policy are Exceptions. Exceptions relate to Exclusions in that they limit the application of an Exclusion. In other words, an Exception explains circumstances in which coverage remains, despite the language of an Exclusion. These are fairly common in Commercial General Liability (CGL) policies.
- Policy Limits and Special Limits. This section states the amount of money that the insurer will pay for certain kinds of losses or for certain kinds of property. For example, while a policy may afford coverage of $50,000 for the loss of jewelry, there may be a further “special limit” on how much will be paid for the loss of a single item of jewlery. This may be stated in terms of, for example, a maximum of $10,000 per item of jewlery.
- Conditions. This section of an insurance policy specifies the responsibilities of the policyholder to the insurer and the responsibilities of the insurer to the policyholder. One very important condition of which many policyholders are not aware or may not fully understand is that of cooperating with the insurer. The duty of cooperation extends to the insurer’s investigation of the loss, cooperation in the defense of a liability claim, and in subrogation efforts. Subrogation is a process by which an insurer that has made payment to or on behalf of its insured attempts to recoup them, in whole or in part, from another party. The insured must not do anything that hinders the insurer’s subrogation efforts without the express permission of the insurer.
- Duties After Loss. This section explains what the insured must do, or may not do, when a potentially covered loss occurs. For example, the insurance policy may require the insured to make temporary repairs so that the damage will not worsen. Filing a police report and preserving physical evidence are other examples. The duries after loss will differ depending upon the nature of the risk insured against.
- Endorsements. Endorsements can be optional coverages or optional amounts of coverage that are available for an additional premium. An example would be an endorsement to a life insurance policy permitting the insured to purchase additional amounts of insurance at specified ages without evidence of insurability. They can also broaden or restrict the scope of coverage, add other parties to the scope of coverage, and perform various other functions.
The point of all of this is not to say that insurance is simple. Far from it. You should not be afraid to ask for help about any aspect of it. However, before you can understand what you don’t understand, you should understand what you do understand. Let me know if I may help.