A Quick Guide to Understanding Insurance Policies

There is little disagreement among policyholders that an insurance policy is an insanely boring piece of literature.  Too often we get our policy and until we have a claim, it is filed with barely a second glance. Is there a way to make reading insurance policies more interesting and more productive?  Let’s try.

To make your policy interesting to read, we are going to go on a scavenger hunt.  Find a pen, pencil, or highlighter; open up your policy; and let’s begin.  We will break down the typical insurance policy into the following parts:  1.) Declarations, 2.) Definitions, 3.) Covered Perils, 4.) Exclusions, 5.) Conditions, and 6.) Endorsements or Riders. Get used to looking in this particular order, regardless of how your policy is arranged.  Because of the nature of insurance policies, you will not overlook anything by going out of the policy’s inherent order; so do not worry about jumping from page to page.

1.      Declarations – The declarations page(s) comprises the who, what, when, and where of your policy.  Look for the named insured, the address, limits of coverage, deductible or retention levels, and listings of forms that might apply to your coverage as well.  Make sure that all the personalized information is correct and all the forms match the ones quoted with your policy.  This should always be your first stop. 

2.      Definitions – Not all policies have a definition section, but most have defined terms.  Hunt down the definitions in your policy, see what the defined terms mean, and to be truly thorough, find those defined terms as they are used in the policy to see if the definitions make sense. 

3.      Covered Peril(s) – Regardless of what type of policy you have purchased, it will always have a specific covered peril or list of covered perils.  It may be called “Coverage Agreement,” “Covered Perils,” or something similar.  (NOTE:  A typical auto policy has as many as six distinct coverages, each with their own terms, conditions, exclusions, and so on.Coverage agreements can also include additional coverages related to the covered peril, i.e., legal defense and other expenses paid by the company in a liability policy. 

4.      Exclusions – Virtually all policies have exclusions, which are usually found in a section entitled “Exclusions” or “What We Do Not Cover.”  Common exclusions include exposures that are deemed uninsurable by law or uninsurable by the insurance company.  Punitive damages, for example, are not insurable in some states because of the act that precipitated the punitive damages. Other exposures, such as asbestos liability, are simply undesirable to the insurer and excluded accordingly. Often, policies have “carve outs” built into the covered peril section or elsewhere in the policy, so look for these exclusions too.  For example, the policy might have a definition section with a definition for “Damages” or “Covered Damages.”  Damages might be stated to include monetary loss suffered by a third party (for a liability policy) and defense costs, but not to include fines, penalties, or punitive damages assessed against the insured. 

5.      General Conditions – All policies have what are called general conditions or common policy conditions if there is more than one coverage section to the policy.  Typical conditions that apply are “Policy Territory,” “Cancellation,” and “Other Insurance” clauses. 

6.      Endorsements or Riders – Many policies have endorsements or riders added to the basic policy to account for variations by state, updates to the basic form, or elements that are peculiar to your situation and require tailoring of coverage. 

Now that you have gone through your policy, the final step is to ask questions.  If there are no questions, move on to the next policy, start with the declarations and don’t stop until you hit the riders.  I guarantee it will be a page-turner!