What Are Insurance Conditions?
The Conditions Outline Duties You Must Fulfill Under the Policy
The Conditions section of an insurance policy outlines various obligations that must be fulfilled for the contract to be enforced. Some conditions apply to the insured while others apply to the insurer.
Where To Find Them
The conditions are typically located in a separate section of a policy or coverage form. Many policies contain more than one set of conditions. An example is the ISO Commercial Property Policy, which contains three groups of conditions. The Loss Conditions explain how losses are valued and paid. The Additional Conditions address issues such as coinsurance and the rights of mortgageholders. The Commercial Property Conditions are contained in a separate form and address matters not explained elsewhere, such as the coverage territory.
Policies that provide multiple coverages typically contain a separate group of conditions for each type of coverage. For example, an ISO package policy that includes general liability and commercial auto coverages will include separate conditions for liability and auto.
Many policies that provide multiple coverages include a separate form entitled Common Policy Conditions. The common conditions apply to all coverages provided by the policy.
While most policy conditions can be found in the Conditions section, some may appear in other parts of the policy. For example, the standard NCCI workers compensation policy contains clauses entitled Other Insurance and Recovery From Others. These clauses are policy conditions but they aren't located in the Conditions section (Part Six of the policy). Instead, both appear under Part One, Workers Compensation Insurance, and Part Two, Employers Liability Insurance. Similar clauses can be found in the Conditions sections of the standard general liability and business auto coverage forms.
The conditions outlined below are found in many types of business policies.
Duties in Event of an Occurrence or Loss
Virtually all policies contain a clause that explains what you must do if a loss or claim occurs. For example, the standard general liability policy contains a condition that requires you to notify your insurer as soon as practicable in the event of an occurrence or offense, or a claim or suit.
Pay close attention to loss conditions! Your failure to comply may give your insurer grounds to deny coverage for a claim.
The other insurance clause explains how your policy will respond to a loss that's covered by your policy and other available insurance. Other insurance clauses vary. Depending on the language used, your policy may provide primary, excess, or no coverage at all when other insurance is available. Alternatively, your policy may share losses on a proportionate basis with other insurance.
Transfer of Rights of Recovery
This clause, often called a subrogation clause, gives the insurer the right to recover the amount it paid for a claim from the party that caused the loss. In other words, if the insurer has paid a loss for which a third party is responsible, the insurer can sue that party for the amount of the payment.
Legal Action Against Us
This provision is often called the "no action" clause because it bars you from filing a legal action (lawsuit) against your insurer unless you have fulfilled all of the requirements under the policy. Some clauses impose a time limit, such as a year from the date of loss, for filing a suit. If the law in your state provides more time to file suits than the time limit described in the policy, the law will override the policy.
The "no action" clause in the standard liability policy states that no one may bring the insurer into a suit seeking damages from an insured. This provision prevents third party claimants from suing the insurer to collect damages against the insured.
This clause automatically expands your policy to include any coverage your insurer has added to your coverage form shortly before or during your policy period, if the extension is free of charge. For example, the liberalization clause in the ISO Business Owners Policy provides that if the insurer has broadened any coverage without an additional premium within 45 days prior to or during the policy period, the broadened coverage will immediately apply.
Cancellation and Non-Renewal
Most policies contain a cancellation clause and a non-renewal provision, which outlines the circumstances under which the insurer may cancel or non-renew the policy. The provisions in the policy are often overridden by a state-required endorsement that modifies the policy as required by state law.
Separation of Insureds
Many liability policies contain a condition entitled Separation of Insureds (or Severability of Interests). This condition often consists of two parts. The first explains how the policy will respond if one named insured sues another. The second part describes how coverage will apply if one insured sues another insured.
Transfer of Your Rights and Duties
Often called the anti-assignment" clause, this wording prohibits policyholders from assigning their rights and duties under the policy to someone else without the insurer's written consent. Insurers screen insurance applicants carefully before they issue policies and this clause prevents policyholders from "giving" their policy to someone else.
While many states permit policyholders to assign their rights after a loss has occurred, pre-loss assignments are generally prohibited
Note that many states allow policyholders to assign their rights to claim payments after a loss has occurred. Assignments made before a loss occurs are prohibited. For example, suppose you own a warehouse that's insured for $1 million under a commercial property policy. The warehouse sustains $10,000 in damage from a tornado. You assign your rights to the $10,000 claim payment to the contractor. In many states, the assignment would be permitted.
No Benefit to Bailee
Many property and auto policies contain a clause entitled No Benefit to Bailee. A bailee is someone who has possession of another person's property but has not assumed ownership of it.
An example of a bailee is an auto body shop. The shop takes possession of customers' autos to repair them. It doesn't assume ownership of those vehicles.
In the standard commercial property policy, the "no benefit to bailee" clause states that no one, other than the named insured, who has custody of the insured property will benefit from the policy. In other words, a bailee is not entitled to a claim payment simply because he or she has possession of the insured property.
Concealment, Misrepresentation or Fraud
Most commercial property policies contain a clause allowing the insurer to void the policy or deny a claim to an insured who has intentionally concealed or misrepresented material facts related to the insurance. The term misrepresentation means a misstatement of the truth. The misstatement is material if the insurer would have made a different decision had it known the true facts.
For instance, you complete an application for property insurance on a building you own. You lie on the application, stating that you use the building as a warehouse when you actually use it to manufacture fireworks. If the building is damaged in an explosion caused by faulty fireworks, your insurer may deny coverage based on material misrepresentation.
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