Anatomy of an Insurance Policy
Anatomy of an Insurance Policy
Condominium Core Concepts Series - Module 2
Insurance policies can be written in a confusing manner, often having some sections alter or limit other sections. Unfortunately, not understanding the intricacies of your insurance policy will not protect you in the event of a loss that simply is not covered. The purpose of this article is to layout the general parts of a policy and highlight critical areas to know as a bare minimum of knowledge.
Let’s start with the basics parts of any policy. An easy acronym to use is DICE, but this is not to be construed as how it will be presented. While these are parts of a policy, they are not typical of a table of contents (below right).
Parts of Policy vs Table of Contents
A full policy includes all endorsements, forms, exclusions, etc stated in the Declaration. Each of these sections has a purpose and contains information that can affect the provisions in the rest of the policy.
1. Declaration: This is the broad overview of what the policy covers, or the “Who, What, When, Where” portion of the document.
Critical to know: This document is going to have the property description, coverage limits, deductibles, premium rates, and a list of other forms or endorsements where coverage would apply or be excluded.
Example:
2. Insuring Agreement: This is a promise to pay for a financial loss to or on behalf of the Insured, or policy holder.
Critical to know: This is typically found individually in each coverage form (see examples below) as a broad statement and then is refined by stated exclusions.
Example:
“We will pay for direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.”
3. Conditions: This section of an insurance policy identifies general requirements of an insured and the insurer on matters such as loss reporting and settlement, property valuation, other insurance, subrogation rights, and cancellation and non-renewal. The policy conditions are usually stipulated in the coverage form of the insurance policy but a commercial property package will most likely also have a Common Conditions portion.
Critical to know: Loss reporting requirements and immediate actions are the main reason insurance claim settlements are delayed or denied. You need to know and understand your obligations after a loss happens and how you need to communicate that loss to your Insurer. Additionally, pay careful attention to the varying requirements for notification of a loss versus proof of loss.
Example:
“Take all reasonable steps to protect the Covered Property from further damage, and keep a record of your expenses necessary to protect the Covered Property, for consideration in the settlement of the claim. This will not increase the Limit of Insurance. However, we will not pay for any subsequent loss or damage resulting from a cause of loss that is not a Covered Cause of Loss.”
“Give us (the Insurer) prompt notice of the loss or damage. Include a description of the property involved.”
4. Exclusions and Limitations: A provision of an insurance policy or bond referring to hazards, perils, circumstances, or property not covered by the policy. Exclusions are usually contained in the coverage form or causes of loss form used to construct the insurance policy while limitations are conditions or procedures covered under a policy but at a benefit level lower than the norm.
Critical to know: This can sometimes create an illusion of coverage - your property is insured BUT what happened is not covered. Read the exclusions and limitations carefully and make sure that your actual risks (windstorm/hurricane, flood, water intrusion, etc) that you are buying coverage for are not excluded.
Example:
“We will not pay for loss or damage caused by or resulting from any of the following:
(1) Wear and tear;
(2) Rust or other corrosion, decay, deterioration, hidden or latent defect or any quality in property that causes it to damage or destroy itself;”
(3) Continuous or repeated seepage or leakage of water, or the presence or condensation of humidity, moisture or vapor, that occurs over a period of 14 days or more.”
“We will not pay for loss of or damage to the interior of any building or structure, or to personal property in the building or structure, caused by or resulting from rain, snow, sleet, ice, sand or dust, whether driven by wind or not, unless the building or structure first sustains damage by a covered cause of loss to its roof or walls through which the rain, snow, sleet, ice, sand or dust enters.”
