What are Insurance Conditions?

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Virtually all insurance policies contain conditions, which are rules of the policy. Conditions outline the rights afforded to the insurer and the policyholder. They also describe the duties each is obligated to fulfill under the insurance contract.

Types of Conditions

An insurance policy may contain a variety of conditions. Some apply only to the insurer. An example is the bankruptcy clause (explained below).

It states that the insured's bankruptcy will not relieve the insurer its duties under the policy. Other conditions apply only to the policyholder. For instance, the Loss Conditions in the ISO Commercial Property Policy require the insured to report a loss to the police if a law has been broken. Many conditions are procedural. An example is the appraisal clause in the standard Business Auto Policy. It explains the process that will be followed if the insured or the insurer demands an appraisal of damaged property.

Where Are They?

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 more than one set of conditions. For example, the ISO Commercial Property Policy contains three groups of 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 contract.

A policy may contain conditions that don't appear in 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. These clauses are policy conditions even though they aren't labeled as such. Similar clauses can be found in the ISO general liability and business auto policies. In those policies, the clauses are located in the Conditions section.

Common Conditions

Certain conditions are found in many types of business policies. Some examples are described below.

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. An example is the standard general liability policy. Its claim-reporting conditions state that you must notify your insurer as soon as practicable in the event of an occurrence or offense, or a claim or suit. This clause is important, as your failure to comply 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 policies provide primary (first-line) coverage. The other insurance clause in the standard general liability policy states that coverage is primary subject to some exceptions. Other policies share losses. For example, the other insurance clause in the ISO property commercial policy states that losses will be shared on a proportionate basis with any duplicate coverage. Some types of insurance, including many E&O policies, apply on an excess basis over other existing coverage.

Rights of Recovery

Most commercial policies contain a subrogation clause. This clause gives the insurer the right to recover the amount it has paid for a loss from the party that caused it.

In other words, if the insurer has paid a loss for which someone (other than an insured) is responsible, the insurer can sue the at-fault party for the amount of the payment.

Legal Action Against Us

This provision is often called the "no action" clause because it limits your right to file an action (lawsuit) against your insurer. It typically bars you from suing unless you have fulfilled all of the requirements under the policy.

Under the ISO property policy, you cannot sue your insurer with regard to a claim if you have failed to provide a description of the damaged property (a condition of coverage). Liability policies often prohibit you or anyone else from suing the insurer under certain circumstances. You are typically barred from suing your insurer to collect a settlement you made voluntarily (without your insurer's consent). Likewise, you are prohibited from suing to collect damages until a final judgment has been made by a court.

Insurance policies may impose a time limit for filing a suit. Some property policies require you to file your suit within two years of the date of the loss. This provision will be overridden by state law if the latter provides more time to file suits than 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. While your policy is in force, your insurer begins using an updated version of the Building and Personal Property Coverage Form. The new form automatically provides (at no additional charge) a $10,000 limit for damage to personal property contained in a temporary storage unit on your premises. The form attached to your policy does not include this coverage. Because your policy contains a liberalization clause, property contained in a temporary storage unit will be automatically covered by your policy. No endorsement is necessary.

Cancellation and Non-Renewal

Many insurance policies purchased by businesses contain both a cancellation clause and a non-renewal provision. These clauses explain the circumstances under which the insurer may cancel or non-renew the policy. State law will override these provisions if it is more favorable to policyholders. 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 often consists of two parts. The first explains how the policy will respond if one named insured sues another. The second part describes how coverage will apply if one insured sues another insured.

Transfer of Your Rights and Duties

Insurers carefully screen insurance applicants before they issue policies. Thus, insurance policies contain a transfer of rights or "anti-assignment" clause." This clause prohibits policyholders from assigning their rights and duties under the policy to someone else without the insurer's written consent. For example, Jim owns a business that he sells to Jane. Jim cannot "give" his business insurance policies to Jane. The policy was issued to Jim only. His rights and obligations under the policy cannot be transferred to Jane without the insurer 's consent.

The anti-assignment clause also prohibits policyholders from transferring their right to collect damages or a settlement. For instance, suppose that Bob has insured an auto for physical damage under a commercial auto policy. Bob signs a contract that gives Jim the right to collect any payment Bob would otherwise receive for a physical damage loss to the vehicle. Bob has violated the anti-assignment clause. His insurer is unlikely to make any loss payments to Jim under Bob's policy.

Note that many states allow policyholders to assign their rights to claim payments after a loss has occurred. Only post-loss assignments are permitted. Assignments made before a loss occurs are prohibited. 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. In many states, the assignment would be permitted.

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

Many property and auto policies contain a clause entitled No Benefit to Bailee. A bailee is someone who has been entrusted with another party's property for a particular purpose. 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.

A bailee does not obtain ownership rights to the property in his or her possession. The auto body shop does not become the owner of the vehicle it is repairing.

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, when 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 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 made a different decision had it known 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 the 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.