By Thomas D. DeMatteo
Vice President & General Counsel
ABC Companies
Reading and understanding an insurance policy is extremely difficult because it is written in arcane language and the words have meaning particular to the insurance business. This column will explain the typical structure of an insurance policy so you can better understand what it contains.
All policies consist of four sections: declarations, insuring agreements, exclusions and conditions. The declaration section provides fundamental information: the named policy holder, who the insurance company is, the limits, the types of coverage and the premiums. It also contains policy numbers, policy periods, deductibles and the type of insurance plan, including additional insureds.
The next section generally contains the agreement of the insurance company about what subjects of insurance are covered in the policy. There are two main areas in this section, one relates to property and the other relates to third-party liability. There are two parts to a property section: (1) the type of property covered, and (2) the perils insured against. Clearly you will be looking for the identification of the buildings and structures including, fixtures, machinery and equipment.
You would then look for additional endorsements to cover personal property such as, equipment, furniture, property of others, newly acquired property, and the like. The next area in the property section identifies the perils insured against, such as fire, vandalism, wind storms, etc. You may need extended coverage endorsements for earthquakes and other water damage.
The liability section is where the insurance company agrees to pay for bodily injury or property damage of others. The injury must be caused by a covered occurrence and the occurrence must take place in the territory covered by the policy. This is also where you find the insurance company's duty to defend a lawsuit.
The next important section is the exclusions section. Under this section there will be two categories: (1) property excluded, and (2) perils excluded. Some examples of property that is excluded are vehicles, aircraft, watercraft, crops, outdoor signs, fences and retaining walls, roads and paving.
Some examples of perils excluded are frost, cold weather, ruptures of water pipes, floods and earthquakes in particular states. Please keep in mind the exclusions can be brought back in under an insurance policy but it will likely cost you more money and would be included in an extended endorsement. Typical exclusions in a liability policy are discrimination in employee matters, punitive damages, product liability and certain types of auto liability.
The conditions section contains cancellation provisions ranging from 30 to 60 days. It also outlines the policyholder's duties in case of a loss or a claim under the policy, defines the territory of the policy, and deals with such subjects as subrogation, other insurance and co-insurance.
Lastly, you should review your policy every year with your broker and keep your policy in a safety deposit box as part of your company's permanent records because many times neither the brokers nor insurance companies retain old policies.
Footnote: Practical Risk Management, ARM Tech, Vol. 1 (1998)
Thomas D. DeMatteo also is an adjunct professor of law at Hamline University School of Law in St. Paul, Minn.