Insurance Basics - How is Your Policy Organized?

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Like many small business owners, you may find your insurance policies confusing. Yet, the policies in use today are considerably easier to read than the ones that were used a few decades ago. In the past, policies were written using long, circuitous sentences and lots of technical jargon. Not surprisingly, few policyholders read them. In recent years, insurers have tried to make policies simpler. To that end, they have shortened long sentences and replaced technical terms with commonly-used words.

While insurance policies are now simpler, they aren't always easy to comprehend. An insurance policy is, after all, a legal contract. This article will explain how policies are usually constructed. It will describe each section of the policy and the type of information you are likely to find there.

 What is a Policy?

The term policy means a complete insurance contract. A typical policy consists of the declarations and an assortment of preprinted forms and endorsements. Generally, a form contains major policy provisions. For example, the Business Auto Coverage Form is the backbone of the ISO commercial auto policy. An endorsement amends the policy in some manner. For instance, a state cancellation endorsement amends the policy cancellation provision so that it complies with state law.

A policy may also contain one or more schedules (lists), such as a schedule of locations or a schedule of covered autos.

In some insurance contracts, such as directors and officers policies, the application is incorporated into the policy.

Monoline or Package Policies

Many commercial insurance policies are package policies. A package contains two or more types of coverage in a single insurance contract. A business owner's policy is a package policy that contains both general liability and commercial property coverages.

Some insurance policies provide only one type of coverage. These are called monoline policies. An example is a policy that affords only commercial auto coverage.

Parts of an Insurance Policy

Most insurance policies contain the sections listed below.

Declarations The declarations usually appears on the first page of the policy. It provides a summary of important information, such as your company's name and address and your insurance agent's name and address. Also included are the policy number, the policy effective dates, and a list of the coverages provided by your insurance contract. If the policy includes more than one type of coverage, it may contain a general declarations plus a separate declarations for each type of coverage. For example, a policy that affords both liability and property coverages will likely contain a general declarations, a liability declarations and a property declarations.

Insuring Agreement: The insuring agreement is a brief statement outlining the payments the insurer promises to make to you (or on your behalf) in the event of a covered loss. It often begins with the words "We will pay." The insuring agreement is the basis of the policy.

Exclusions The exclusions section describes the risks that are not covered under the policy.

There are three types of hazards that are typically the subject of exclusions:

  • Risks that are covered under another type of policy. For instance, a commercial auto policy excludes obligations for which you may be liable under a workers compensation law. Such obligations are insured under a workers compensation policy, so they are excluded by your commercial auto policy.
  • Risks that may be covered for an additional premium. For instance, your commercial auto policy does not cover (as insureds) your employees while driving autos owned by them. However, you may elect to have an endorsement added to your policy that covers employees while using their personal vehicles.
  • Risks that are not insurable. An example is losses caused by war. War is a catastrophic hazard so it is excluded under many types of policies.

    If a policy provides more than one coverage, each coverage section may contain a separate set of exclusions. Some policies also contain a list of common exclusions, which apply to all coverages.

    Conditions The Conditions section describes the stipulations that apply to you and other parties covered by the policy. You must fulfill the policy conditions in order to obtain compensation for a loss. For instance, the policy may state that you must report losses to the insurer as soon as possible.

    The Conditions section also describes rules and procedures the insurer promises to follow while the policy is in effect. For example, under a commercial property policy, the insurer may specify how it will determine the value of a certain type of property if that property is damaged.

    Definitions Most policies contain words that have special meanings under the contract. Defined terms are usually highlighted in bold or italicized text. Some policies contain only a few defined terms while others contain many of them. Definitions can broaden or narrow the scope of coverage provided by the policy. Defined terms are explained in the policy's Definitions section.

    For example, suppose that the term bodily injury, as defined in your liability policy includes both mental anguish and mental injury. Because these types of injuries are not included in the definition of bodily injury found in the standard ISO liability policy, your policy affords broader coverage.

    Definitions can also serve as exclusions. For instance, the definition of employee in the ISO  commercial auto policy states that the word employee does not mean a temporary worker. Temporary workers are not addressed in the policy exclusions. Unless you read the definition of employee, you would not be aware that temporary workers are not insureds under the policy.