Client Q&A: I think I have an insurance claim, but I can’t make heads or tails of the policy. Help!
I think I have an insurance claim, but I can’t make heads or tails of the policy. I don’t know what is and is not covered. Help!
A Guide to Reading an Insurance Policy
If you suffer a loss or destruction of your property, or if someone threatens to bring a legal claim against you, among your first questions may be whether you have insurance coverage to compensate you or to pay for your defense. Like any legal document, an insurance policy can be baffling to the uninitiated reader. If the insurance carrier tells you that coverage is limited in some way, or perhaps not available at all, how do you know if they are treating you fairly? Having a basic understanding of the structure of an insurance policy can help you to protect your rights. (It is also usually a good idea to consult with a qualified attorney in any contested insurance coverage matter.)
Broadly-speaking, insurance policies fall into two categories: "first-party" policies (which cover against damage to or loss of the insured's property), and "third-party" policies (which cover the insured for liability to others). Some insurance policies, such as a typical homeowners policy, may provide both first-party and third-party coverage. Future posts will explore the types of insurance in more detail, but the basic structure of most insurance policies is the same.
Reading an insurance policy is a bit like assembling a jig-saw puzzle. This is because policies are typically cobbled together from standard forms that are customized by "endorsements" appended at the end. Thus, to figure out precisely who and what is—and is not—covered requires carefully reading and cross-referencing the different parts of the policy. The three principal sections of a typical policy—the Declarations, Policy Forms, and Endorsements—are discussed below.
The first part of an insurance policy—and usually the only part that is customized for a specific policyholder—is the "Declarations." The Declarations provide a summary of the essential terms of the policy, including the identity of the insureds, the time period covered by the policy, the amount of insurance provided and of any deductibles that must be satisfied before coverage kicks in. The Policy Forms (discussed below) will frequently reference the Declarations. For example, a provision of a liability policy might say:
We will pay on behalf of the Named Insured, Loss from Claims made against the Named Insured during the Policy Period.
To identify the "Named Insured" and the "Policy Period," you would have to look back to the Declarations.
The Declarations provide a high-level overview of the coverage, but the devil is in the details—and those are spelled out in the Policy Forms, as modified by any Endorsements.
The heart of an insurance policy is the Policy Forms. These are standard industry or company documents that set forth in detail the rights and obligations of the insurance company and the insured. The three principal components are (1) the Insuring Agreement and related Definitions; (2) the Exclusions; and (3) the Conditions.
- Insuring Agreement and Definitions
The Insuring Agreement spells out the type of risk that the policy covers. For example, a first-party policy will cover a loss of property resulting from a particular risk or risks. A third-party policy will cover the insured's liability to others, and may also obligate the insurance carrier to hire a lawyer to defend the insured in a lawsuit, or to reimburse the insured for legal fees and costs.
The Insuring Agreement must be read in conjunction with the Definitions section, which defines the key terms (sometimes by cross-referencing the Declarations). For example, a property policy might state:
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.
This provision can only be understood by looking at the Definitions to see what constitutes a Covered Cause of Loss. It could be defined broadly to cover "all risks," or more narrowly to cover only a specific risk, such as fire or flooding.
Although the scope of coverage under the Insuring Agreement may appear broad, it will be narrowed by the Exclusions section. Thus, once you determine what coverage the Insuring Agreement and its associated Definitions provide, you need to assess what the Exclusions take away. In a general liability policy, for example, there may be an exclusion for harms that are "expected or intended" by the Policyholder, or claims arising from a breach of contract. Other types of insurance that provide defense coverage may exclude claims arising from fraudulent conduct, but typically only where there is a "final adjudication" that the insured committed the alleged fraud. These are only a few examples. It is important to read the policy Exclusions carefully to understand what is not covered.
In addition to defining the obligations of the insurer, the policy also places certain obligations on the insured, which are spelled out in the Conditions section of the policy. Often the most important Condition is the requirement to give the insurance company prompt notice of a claim. You can't get coverage if you don't ask for it, and in some circumstances, the insurance company can seize on a delay in notice as a ground to disclaim coverage. Policies also typically condition coverage on the insured providing reasonable cooperation to the insurance carrier in its investigation of the claim, and in the case of a policy with a duty to defend, cooperating in the defense.
Just when you thought you were done, there is another critical component of any insurance policy that you must consult: the Endorsements. Rather than tailoring its standard forms to the policyholder, insurance companies modify the forms—often in very significant ways—by appending Endorsements to the policy. The Endorsements may expand or reduce the scope of coverage by changing policy Definitions, modifying the terms of Insuring Agreement, or adding, eliminating or changing the Exclusions.
Interpreting an insurance policy can be a daunting task. Knowing what to look for is the first step in protecting your rights. An experienced attorney can also be helpful in guiding you through the process. We have a great deal of experience advising policyholders in negotiating with, and when necessary, pursuing coverage lawsuits against, insurance carriers. If you have a question about your insurance policy, we would be happy to assist you.