What are Insurance Conditions?

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Virtually all insurance policies contain conditions. This article will explain what conditions are and the purposes they serve in a policy.

What Are They?

Conditions are essentially rules of the policy. They outline the rights and obligations of the insurer and the policyholder. Some insurance conditions apply only to the insurer while others apply to the policyholder. Many conditions are procedural.

For example, a commercial auto policy contains a Loss Payment provision, which explains the options available to the insurer when paying a physical damage loss. Other conditions are intended to encourage the policyholder to practice good risk management. An example is the vacancy clause found in many commercial property policies.  

How to Find Them

Conditions are often found in a separate section of a policy or coverage form. Not surprisingly, this section is often entitled Conditions.

Many policies contain multiple sets of conditions. For example, the ISO commercial property policy contains three groups of property conditions. The Loss Conditions explain how losses are valued and paid. The Additional Conditions address issues such as coinsurance and the rights of mortgageholders. The Commercial Property Conditions are contained in a separate form. These address matters not explained elsewhere, such as the coverage territory.

Package policies, which include two or more types of coverage, typically contain separate conditions for each type of coverage. For example, a policy that includes general liability and commercial property coverages will include liability conditions and property conditions. A package policy may also contain a Common Policy (or General) Conditions section that applies to all coverages included in the policy.

Conditions may appear in parts of a policy other than the Conditions section. For example, the standard NCCI workers compensation policy contains a Conditions section under Part Six. Nevertheless, both Part One (Workers Compensation) and Part Two (Employers Liability) contain clauses entitled Other Insurance and Recovery From Others. In other types of policies, these provisions (which are explained below) generally appear in the Conditions section.

Conditions Found in Many Policies

Here are some conditions that appear in many types of business policies.

Duties in Event of an Occurrence or Loss

Virtually all policies contain a clause that explains what you must do if a loss or claim occurs. For example, the claim-reporting conditions in the standard general liability policy state that you must notify your insurer as soon as practicable in the event of an occurrence or offense, or a claim or suit. Pay close attention to this clause. Your failure to comply with its requirements may give your insurer grounds to deny coverage for a claim.

Other Insurance

This clause explains how the policy will respond when other coverage exists for a claim that is covered by your policy. Some clauses state that the policy provides primary insurance (first-line) coverage.

For example, the other insurance clause in the standard general liability policy states that the policy affords primary insurance subject to some exceptions. Some policies, such as the ISO property policy, state that they will share losses with any other available policy. Other policies, including many E&O policies, apply on an excess basis over other existing insurance.

Rights of Recovery

Most commercial policies contain a subrogation clause. This clause gives the insurer the right to recover the amount of a claim it has paid from the party that caused the loss. In other words, if the insurer has paid a loss for which someone (other than an insured) is responsible, the insurer can sue that party for the amount of the loss payment.

Legal Action Against Us

This provision, which is often called the "no action" clause, limits your right to sue your insurer.

It typically bars you from suing unless you have fulfilled all of the requirements under the policy. For instance, you cannot sue your property insurer regarding a claim if you have failed to provide a description of the damaged property (a condition of coverage). Liability policies often limit the ability of you or someone else to sue the insurer regarding a settlement or judgment. You cannot sue the insurer to collect a settlement you made voluntarily (without your insurer's consent). Likewise, you cannot sue to collect damages until a final judgment has been made by a court.

Some policies specify a time limit for filing a suit. For instance, some property policies require you to file your suit within two years of the date of the loss. If the law in your state provides more time to file suits than what is stated in the policy, the law will override the policy.

Liberalization

This  clause automatically expands your policy to include any coverage your insurer has added to your coverage form. The clause typically applies to any extension that was made shortly before or during your policy period, if the extension is free of charge.

For example, suppose you are insured under a commercial property policy. During the term of your policy, your insurer begins using a newer version of the Building and Personal Property Coverage Form than the one included in your policy. The new form provides (at no additional charge) a $10,000 limit for damage to personal property contained in a temporary storage unit on your premises. This coverage will be automatically included in your current policy. No endorsement is necessary.

Cancellation and Non-Renewal

Most insurance policies purchased by businesses may be cancelled or non-renewed by the insurer under certain circumstances. Thus, many policies contain both a cancellation clause and a non-renewal provision. These clauses will be overridden by state law if the law is more lenient toward policyholders than the policy. For example, a state law that requires the insurer to provide 60 days' notice to the policyholder if the policy is non-renewed will supersede a policy provision that requires only 30 days' notice.

Separation of Insureds

Many liability policies contain a condition entitled Separation of Insureds (or Severability of Interests). This condition explains how the policy will respond to a suit by one named insured against another. It also describes how coverage will apply if one insured sues another insured.

Transfer of Your Rights and Duties

This provision is often called the "anti-assignment" clause. It prohibits you, the policyholder, from assigning your rights and duties under the policy to someone else without your insurer's written consent. For example, Jim owns a business that he sells to Jane. Jim cannot "give" his business insurance policies to Jane. Jim has rights and obligations under the policy that cannot be transferred to Jane unless the insurer agrees.

This clause also prohibits you from transferring your right to collect damages or a settlement. For instance, Bob signs a contract that gives Jim the right to collect any payment Bob would otherwise receive from Bob's auto insurer for a physical damage loss to one of Bob's vehicles. Bob has violated the anti-assignment clause. His insurer is unlikely to make any loss payments to Jim under Bob's policy.

In the previous example, suppose that Bob has already sustained a physical damage loss when he assigns his right to collect a claim payment under the policy to Jim. The assignment would likely be permitted. In many states, courts permit policyholders to assign their rights to claim payments after a loss has occurred. Assignments made before a loss occurs are prohibited.

Bankruptcy

This clause states that that the insurer's obligations under the policy don't change if the policyholder files for bankruptcy or becomes insolvent. The insurer is still required to pay claims.

No Benefit to Bailee

A bailee is a party that has been entrusted with someone else's property for a particular purpose. The baillee has possession of the property but no ownership rights. An example is an auto body shop. A vehicle owner gives the body shop possession of a damaged vehicle so the shop can repair it. The shop doesn't become the vehicle owner.

The "no benefit to bailee" clause applies to commercial property and auto physical damage coverages. It states that no one, other than the policyholder, who has custody of the insured property will benefit from the policy. In other words, a bailee is not entitled to a claim payment simply because he or she has possession of the insured property. Under a commercial auto policy, the bailee may be a parking garage, towing company, repair shop or anyone else who charges a fee to obtain control over the vehicle.

Concealment, Misrepresentation or Fraud

This clause allows the insurer to void the policy if the policyholder has committed a fraudulent act. An insured commits fraud when he or she intentionally deceives an insurer for the purpose of financial gain. The fraud may be committed when coverage is purchased, a claim is filed, or at some other time. For instance, a business owner purchases physical damage coverage for a nonexistent vehicle. He then reports the vehicle stolen and files a theft claim.

The "fraud clause" also allows the insurer to deny coverage if any insured (including the policyholder) has intentionally misrepresented or concealed a material fact regarding the insurance coverage. The term misrepresentation means a misstatement of the truth. The misstatement is material if the insurer would have decided otherwise if it had been aware of the true facts.

For instance, you complete an application for property insurance on a building you own. You lie on the application, stating that you use building as a warehouse. In reality, you use it to manufacture fireworks. If the building is damaged in an explosion caused by faulty fireworks, your insurer may deny coverage based on material misrepresentation.