How a Business Insurance Policy Is Organized
The coverage form is the backbone of the policy
While insurers have reworked the language of business insurance policies over the years to make them less convoluted and easier to comprehend, many small business owners may still find their policies confusing. Since an insurance policy is, after all, a legal contract, it's important to learn how it is normally constructed.
To gain a greater understanding of what a business insurance policy actually entails, it's best to identify each section of the policy and the type of information you are likely to find there.
Many states (like Michigan, for example) have passed "plain English" legislation that requires insurance policies and other consumer contracts to be written in simple language that's easy to read.
What Is a Policy?
The term policy means a complete insurance contract consisting of the declarations and one or more preprinted forms. It may also include one or more endorsements. A coverage form contains major policy provisions related to a specific coverage. For example, the Commercial General Liability Coverage Form is the backbone of the Insurance Service Office (ISO) general liability policy. It contains key provisions related to general liability coverage.
An endorsement amends the terms or conditions contained in a coverage form or the declarations. For instance, a cancellation endorsement attached to a general liability policy amends the cancellation provisions contained in the preprinted coverage form so they comply with state law.
Some policies contain lists called schedules. For instance, a property policy might include a schedule of covered locations, while an auto policy might contain a schedule of covered autos.
Components of an Insurance Policy
Most insurance policies contain the five basic components outlined below.
The declarations is usually the first page of the policy and provides important information, such as your company's name and address and your insurance agent's name and address. It also includes the policy number, the effective dates, and a summary of the coverages and limits it provides. A package policy may contain a general declarations section and separate declarations for each type of coverage it includes. For example, a policy that affords both liability and property coverages may contain general declarations, liability declarations, and property declarations.
The insuring agreement is a brief statement outlining the payments the insurer promises to make to you (or on your behalf) in the event of a covered loss. It often begins with the words, "We will pay." The insuring agreement describes the coverage in broad terms. The coverage is subsequently narrowed and refined by the exclusions, conditions, and definitions.
The exclusions eliminate coverage for risks the insurer won't cover at all or will cover only if you pay an additional premium. Some risks are excluded because they are normally covered by another type of policy. For instance, the standard business auto policy covers physical damage to cars and trucks owned by a business. Accordingly, the standard commercial property policy includes vehicles licensed for road use in its list of excluded property.
Some exclusions apply to risks that may be covered for an additional premium. For instance, the standard general liability policy excludes "fellow employee suits," meaning suits filed by one employee against another. Nevertheless, some insurers will cover such suits if the policyholder pays an additional premium.
The conditions are the rules of the policy and outline obligations that must be fulfilled for the insurance contract to be enforced. They describe procedures that must be followed with regard to claim reporting, valuing damaged property, canceling the policy, and various other actions. Some conditions apply to the named insured, others apply to all insured parties, and some apply to the insurer.
Many policies contain more than one set of conditions. A policy that includes property, liability, and auto insurance will likely contain separate conditions for each coverage plus a "general conditions" section that applies to all coverages.
Most policies contain defined terms, which are usually highlighted in bold or italicized text. The meanings of these terms are explained in the policy's definitions section. Some policies contain a few defined terms while others contain many.
Definitions can broaden or narrow the scope of coverage. For example, a general liability insurer might expand coverage by defining a term, such as "bodily injury," more broadly than the standard liability policy. Alternatively, the insurer might reduce coverage by defining a term like "damages" that isn't defined in the standard policy.
Definitions may serve as exclusions. For example, the standard general liability policy doesn't address temporary workers in the exclusions section. Instead, temporary workers are excluded via the definition of "employee," which states that the term does not mean a temporary worker.