Many insurance companies issue policies written in archaic terms with little or no apparent organization. Most people avoid reading insurance policies until faced with a claim. Even the recent trend toward "plain language" insurance policies has provided little help to the lay person to understand the coverage provided by the policy. Contrary to the initial appearance of the typical insurance policy, there is a step by step method that insurance professionals and attorneys use to analyze a policy. My goal in this article is to explain that method in plain terms, explain some of the technical terms, and introduce basic insurance law concepts. Of course, every situation is unique, different companies issue different policies, and different kinds of policies may not use the exact terminology I use here. However, after reading this article you should be able to at least begin to understand a property, inland marine, ocean marine, disability, commercial liability, or life insurance policy, or decipher that letter from your lawyer that seems almost as confusing as the policy itself.
In sum, most insurance professionals and attorneys analyze an insurance policy as follows:
Step 1: Review the Declarations Page
Step 2: Get the Right Policy Forms
Step 3: Understand the Types of Insurance Forms in the Policy
Step 4: Identify the Insuring Language
Step 5: Review the Exclusions
Step 6: Apply the Language of the Policy to the Claim, Keeping in Mind Legal Principles
I. Forms, Forms and More Forms
Most of the time, an insurance policy is really a collection of a many different forms. The first step to understanding a policy is to learn that it resembles a jigsaw puzzle, with many pieces fitting together to form one whole. In addition, you need to make sure you have all of the pieces of the puzzle, as I will explain below.
A. Step 1: Review the Declarations Page
Most types of insurance will feature a declarations page. The declarations page helps answer the questions who, what, when, where, and how much. The declarations page usually contains the following information:
(1) Name and address of the insured (i.e. the person or company who purchased the policy), the insurer (i.e. the company that is bound by the policy); and the insurance broker (the person who sells the policy, who may or may not be affiliated with the insurer);
(2) The policy number (most insurance companies track by number, not name, so this can be very important when a claim arises);
(3) The policy period, which are the dates the policy covers;
(4) A description of the types of coverage the insurance provides. For example, the declarations page of a property policy will tell you what property is covered, generally what type of losses are covered, such as fire, crime, business interruption, etc., and usually the premium for each type of coverage.
(5) A list of the forms applicable to the coverage. Most insurance companies use standard forms for all of their insureds. The declarations page will list code numbers identifying the appropriate forms that make up the insurance policy.
B. Step 2: Get the Right Policy Forms
After the declarations page, there will be policy forms. An important first step is to make sure you have all of the correct forms. Do not trust the insurer or broker to have sent you the correct forms, or all of the forms. Make sure you have the declarations page for the policy period in which the loss occurred. Check the declarations page, and find the list of forms and the code numbers. Most policy forms have their identifying code number in the header or footer. You will save a lot of time, energy, aggravation and money by making sure you have all of the correct forms prior to reading them. After all, if you are going to go to the trouble of reading an insurance policy, it really ought to be the right one!
C. Step 3: Understand the Types of Insurance Forms
Now that you have all of the forms, it is time to start to try to make sense of them. First, it will be helpful to identify in general terms the kinds of forms that you will commonly encounter.
1. Forms Related to Premium, Cancellation and Renewal
Most policies have forms setting forth when premium (i.e. the cost of the insurance) falls due, under what conditions the premium can change, how premium is calculated, and what happens if premium goes unpaid. Similarly, the policy may set forth the rules governing cancellation and renewal of the policy.
2. Insuring Forms
The insuring forms set forth what the insurance company is promising to cover, and often set forth kinds of losses the insurance company will not cover. When a claim arises, the language in the insuring forms will be critical to determining whether the insurance company is obligated to pay.
You should look for provisions setting forth time limits on when to make claim and when to file suit. Many property and marine insurance policies have time limits to sue, and if you do not sue in time, your claim will be barred no matter what the merits. Many times these limits are one year. You should calendar these dates so that they do not get missed down the road. Lastly, even if you think you are past the time limit, you may want to contact a lawyer to be sure. Sometimes missing a date can be excused in certain circumstances, and you will need a lawyer to advise you whether it is too late to make claim or sue.
An endorsement is a form that modifies the coverage set forth in the insuring forms. Sometimes an endorsement will be called an "endorsement," other times a "rider" or "special form."
Sometimes the insured may purchase expanded coverage by paying an increased premium that adds the endorsement. For example, a business might buy a policy covering the cost of repairing fire damage to its building. That business might also buy an endorsement covering lost profits during the time its facility is closed after a fire. Other times, the insurer will add an endorsement restricting coverage. For example, a disability insurer might add an endorsement saying that it will not pay for losses arising from back injuries if the insured is known to have a bad back.
Because endorsements expand or restrict coverage, they can be very important to determining if coverage exists.
4. First Party Insurance vs. Liability Insurance
Insurance policies can be divided into two broad categories. First party insurance covers the property of the person who purchases the insurance policy. For example, a homeowners' policy promising to pay for fire damage to the homeowner's home is a first party policy. Liability insurance, sometimes called third party insurance, covers the policy holder's liability to other people. For example, a homeowners' policy might cover liability if someone trips and falls on the homeowner's property. Sometimes one policy, such as in these examples, may have both first and third party coverage.
You need to make sure that if you have a first party loss, you look at the first party provisions of the policy. Likewise, if you are trying to determine whether there is coverage for liability to a third party, you need to look at the third party coverage.
Lastly, liability insurance provides two separate benefits. First, the policy will cover the damages incurred by the third party. Sometimes this is called providing "indemnity" for the loss. Second, however, most liability policies provide a duty to defend. The duty to defend requires the insurance company to pay for lawyers, expert witnesses, and court costs to defend the third party's claim. These costs can sometimes be dramatic and should not be ignored when facing a liability claim.
II. Analyzing the Policy
A. Step 4: Identify the Insuring Language
The insuring language states broadly what the insurance will cover. Usually this language will be found in one of the insuring forms, but might also be found in an endorsement. I never cease to be amazed at how difficult it can be to find the insuring language. You should look for statements such as:
"This insurance covers. . . " "We will pay for. . . " "Coverage is provided. . . "
Usually, the insuring language will be very broad. A typical property policy might say "we will pay for direct physical loss or damage to the property described in the declarations, so long as the cause of loss is not otherwise excluded." Taken literally, this language covers lots of kinds of losses. However, the next step is to look at exclusions.
B. Step 5: Review the Exclusions
Insuring language tends to use broad sweeping statements as to what the insurance coverage. Usually, however, exclusions will limit the types of losses the policy covers. An exclusion is just what it sounds like, it excludes certain types of losses from the all encompassing insuring language.
Take a flood case for example. A homeowners' policy might have insuring language like that above covering "all direct physical loss or damage." Flood damage would certainly fall within that definition. However, a homeowners' policy might have an exclusion, saying the insurance company will not pay for flood damage. The exclusion limits what the insurance company has to cover.
When trying to determine if a policy covers a given loss, you need to review the exclusions to see if any apply to the situation. An exclusion can render an otherwise covered claim not covered.
C. Step 6: Apply the Language of the Insurance Policy to the Claim, Keeping in Mind Legal Principles
Once you have the policy and have sorted through the insuring language and exclusions, an insurance professional or attorney will try to determine whether the claim is covered. What the policy says, of course, is very important. However, because sometimes situations arise that no one anticipated, or a policy is not written very well, oftentimes disputes arise between the insurer and insured. Although there is no way to set forth all of the principles of insurance law here, a few of the rules can give a feel for how the courts treat insurance cases. These rules govern in California and most marine cases, and other jurisdictions may differ.
1. The insured bears the initial burden of proving the loss falls within the insuring language. Generally, insuring language is interpreted broadly to find coverage.
2. The insurer bears the burden of proving the loss falls within an exclusion. Generally, exclusions are interpreted narrowly, once again to try to give the insured the benefit of the doubt.
3. Because the insurance company wrote the policy, and there is a broad public policy in favor of spreading risks, if a policy can be interpreted in more than one way, the tendency is to interpret the policy to provide coverage. However, a court will not strain to find an ambiguity where none exists, and should not interpret the policy in a way that violates the reasonable expectations of the parties.
4. Specific provisions will control over general provisions.
5. The policy will be read to try to give effect to all of the words in the policy. Said another way, the policy should not be interpreted to render some provisions meaningless.
6. In a liability policy, the duty to defend can be broader than the duty to indemnify. In other words, the insurance company may be obligated to pay for lawyer costs defending a case even if it turns out there is no coverage for the claimant's loss.
If you have read this far, I hope you have found this outline helpful. Although insurance law can be very complicated, this step by step process can help you understand how insurance adjusters and lawyers analyze a case. At a minimum, I hope this outline will help you better communicate with the adjusters, brokers, and lawyers should you suffer a loss.