HOW TO READ and (BETTER) UNDERSTAND ANY INSURANCE POLICY

Insurance policies differ as to the risks that they cover. In insurance parlance, risk is the chance that an event resulting in a financial loss may or may not occur.

The risks covered by different kinds of insurance policies are the main factors that differentiate them. For example, a homeowner’s insurance policy protects against risks related to residential property and often, the contents located within them. In contrast, a life insurance policy protects against the risk of death. While everyone will die, life insurance serves as a “hedge” against premature death. Therefore, it may more properly be called “death insurance”, but it isn’t. 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 in all of these kinds of insurance that correlate with the nature of the risk and the kind of insurance involved.

There are myriad types of personal and commercial insurance policies. All of them have characteristics unique to the risks, but all have some common ones, too. One of the main ones is the way in which the policy is constructed. For the most part, the sections of each are very similar regardless of the kind of risk against which the policy insures. Furthermore, the import of the section is about the same. An understanding of these commonalities will permit you to read and to better understand any insurance policy.

Declarations: The Declarations is usually the first page of the policy that provides any substantive information on the nature and extent of the coverage. There may be a cover page that precedes it, but it normally only shows general information about the insurer, the agent or broker that sold the policy, and on life insurance policies sometimes the name and gender of the person insured, and other very generic information.

The Declarations shows who or what is the subject of the insurance. It also states the duration of the policy (the effective and termination dates, otherwise called “the term”). 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 means the “policy limits”, something that it is critical to understand. Insurance is 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 available under the policy. That’s important because in the normal case, it defines the total dollar amount that the insurance company is obliged to pay, assuming that the policy is in force at the time of a covered occurrence and the person or entity insured has complied with all conditions and duties requires of him/her/it by the policy.

Definitions: This section defines words and phrases used throughout the policy. Ordinarily, they are given their usual meaning, but not always. Therefore, when reading an insurance policy, it is important to refer to the Definitions section because the insurer may have defined a term in a way that differs from the usual. Also, if you don’t know or are uncertain of the meaning of a term, you should refer to the Definitions section to see if it is a defined term. For example, a car is not a motorcycle although they are both 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 as being ambiguous. Assuming that both definitions are reasonable in the context used, and one usage would result in a finding of coverage whereas the other would not, all other things being equal, a court would normally use the construction that finds coverage. That rule of construction is predicated mainly on the fact that the insurer chose the language and if it wanted to exclude coverage, it could have used explicit language.

Coverage Parts: This section describes the specific coverage provided. For example, some types of policy cover only property loss (like the collision coverage of an auto policy or the contents coverage of a homeowner’s policy). Others cover liability (such as a medical malpractice policy covering the negligence of a physician that results in injury to a patient).

Exclusions: These can be tricky. They describe the limitations on coverage and circumstances under which there be may be no coverage at all. Usually, a total exclusion of coverage is based on how a loss occurred. An example is that a life insurance policy will exclude death by suicide for a stated number of years after the policy is issued.

Policy Limits and Special Limits: This section states the amount of money that the insurer will pay for certain kinds of loses or certain kinds of property. For example, while a policy may afford coverage of $50,000 for the loss of jewelry, there may a “special limit” of $10,000 for any single item of jewelry.

Conditions: This section specifies the responsibilities of the insured to the insurer and of the insurer to the insured. A very important responsibility of the insured is to cooperate with the insurer. That extends to the investigation of the loss, in the defense of a liability claim, and in efforts to recoup what the insurer pays to or on behalf of the insured. The latter refers to theories of law called “contribution”, “subrogation”, and “indemnity.” Although they are legally distinguishable, they are similar in the sense that by them, the insurer attempts to recover or minimize its outlay when persons or entities other than the insured may be liable, in whole or in part, for a claim.

Duties After Loss: This section explains what the insured must do, or may not do, when a potentially covered loss occurs. For example, the policy may require the insured to make temporary repairs so that damage does not worsen. Filing a police report or preserving evidence are other examples. Just what the duties may be depends on the nature of the loss and the type of policy involved.

Endorsements: Endorsements can be optional coverages or optional amounts of coverage that are available for an additional premium. An example is a “waiver of premium” endorsement that relieves the insured of the obligation to make life insurance premium payments during a period of total disability.

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