What Are Insurance Conditions?

Definition & Examples of Insurance Conditions

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Insurance conditions are requirements that need to be met for the coverage to be valid. They may address issues like how notice of a claim should be given and what the insured party should do in the event of a loss.

Learn more about insurance conditions and how they work.

What Are Insurance Conditions?

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.

Insurance conditions may include:

  • How to report a loss
  • How long you have to report a loss
  • How property will be valued
  • How and when a policy can be canceled
  • When the insurer can non-renew the policy

How Insurance Conditions Work

Policy conditions are typically listed in one or more sections of a policy. An example is the Insurance Services Office's (ISO's) commercial property policy, which contains three groups of conditions. The ISO offers standard policy templates that many insurers use.

The loss conditions explain how losses are valued and paid. The additional conditions section addresses 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.

Examples of Insurance Conditions

The conditions outlined below are found in many types of business policies.

Duties in the 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, a standard general liability policy has a condition that requires you to notify your insurer as soon as practicable in the event of an occurrence or offense that may result in a claim or suit. General liability policies provide protection in the event of claims that occur due to your business operations.

Pay close attention to loss conditions. Failure to comply may give your insurer grounds to deny coverage for a claim.

Other Insurance

"Other insurance" conditions explain how your policy will respond to a loss that's also covered by other insurance. Depending on the language used, your policy may provide primary, excess, or no coverage 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 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 prohibits you from filing a legal action (lawsuit) against your insurer unless you have fulfilled all of the requirements under the policy. Some conditions 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 lawsuits than the time limit described in the policy, the law will override the policy.

Liberalization

This condition automatically expands your policy to include any coverage your insurer added to your policy shortly before or during your policy period as long as you didn't pay a premium for the change. Your policy period is the time when your policy is in force.

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 before or during the policy period, the expanded coverage will immediately apply.

Cancellation and Non-Renewal

These conditions outline the circumstances under which the insurer may cancel or non-renew the policy. These provisions are often overridden by state-required endorsements that modify the policies as required by state law.

Transfer of Your Rights and Duties

This condition 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.

No Benefit to Bailee

A bailee is someone who has possession of another person's property but has not assumed ownership of it. In a standard commercial property policy, this condition 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 they have possession of the insured property. If you had inventory in a storage unit and it was damaged, you would receive the insurance benefits, not the storage company.

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, consider a business owner who completes an application for property insurance on a building they own, but lies on the application, stating that the building is used as a warehouse when it's actually used to manufacture fireworks. If the building is damaged in an explosion caused by faulty fireworks, the insurer may deny coverage based on material misrepresentation.

Key Takeaways

  • Insurance conditions are requirements that need to be met for the coverage to be valid. 
  • They may address issues like how notice of a claim should be given and what the insured party should do in the event of a loss.
  • Conditions are typically listed in a specific section of your policy. Review policy conditions carefully, as not following them could give your insurer grounds to deny coverage. 

Article Sources

  1. Property Insurance Coverage Law. "Building and Personal Property Coverage Form," Page 10. Accessed Aug. 1, 2020.

  2. Property Insurance Coverage Law. "Building and Personal Property Coverage Form," Page 13. Accessed Aug. 1, 2020.

  3. Colony Insurance. "Commercial Property Conditions," Page 1. Accessed Aug. 1, 2020.

  4. North Star Mutual. "Commercial General Liability Coverage Form," Page 11. Accessed Aug. 1, 2020.

  5. IRMI. "Other Insurance Clause." Accessed Aug. 1, 2020.

  6. Legal Information Institute. "Subrogation." Accessed Aug. 1, 2020.

  7. United Policyholders. "Lawsuit Limitations in Insurance Policies." Accessed Aug. 1, 2020.

  8. Canopy Claims. "Businessowners Coverage Form," Page 52. Accessed Aug. 1, 2020.

  9. FindLaw. "Misrepresentations and Concealments in the Application for Insurance: An Analysis of the Insurer's Right to Rescind Coverage." Accessed Aug. 1, 2020.