Common Policy Provisions

Most property and casualty policies share a set of standard provisions. Whatever the line of insurance, a policy states when and where it covers, how much of each loss the insured keeps, how it shares a loss with other insurance, what the named insured must do, and what rights the insurer keeps. This chapter covers those common provisions, and how a commercial policy is assembled from its parts.

Policy clauses

Policy period

The policy period is the time during which coverage is in force. The declarations show its inception and expiration dates, and a policy generally begins and ends at 12:01 a.m. standard time at the named insured’s address. What must happen during the policy period depends on the policy:

• An occurrence policy covers injury or damage that occurs during the policy period, even if the claim is made years later
• A claims-made policy covers claims first made during the policy period, or during an extended reporting period (for injury after any retroactive date)

Policy territory

The policy territory (or coverage territory) is where a loss must happen to be covered. The personal auto policy covers accidents in the United States, its territories and possessions, Puerto Rico and Canada. The commercial general liability policy’s territory is similar, adds international waters and airspace in travel between those places, and extends worldwide for certain products and activities, provided liability is decided in a suit on the merits within the core territory, or in a settlement the insurer agrees to. Commercial property forms generally cover property at the described premises, with limited extensions away from them, within the United States, Puerto Rico and Canada. A homeowners policy covers the insured’s personal property anywhere in the world.

Deductibles/self-insured retention

A deductible is the part of a covered loss the insured pays before the insurer pays anything. Deductibles lower the premium, eliminate the cost of handling small claims, and give the insured a reason to prevent losses. A deductible may be a flat dollar amount per loss, a percentage of the insured value (common for windstorm and earthquake), or an aggregate amount for the policy period. On property coverage, the insurer subtracts the deductible from its payment. On liability coverage with a deductible, the insurer usually handles and pays the claim, then is reimbursed by the insured for the deductible amount.

A self-insured retention (SIR) works differently. Under an SIR, the insured itself pays (and usually handles) losses up to the retention amount, and the insurer’s obligation begins only above it. Umbrella policies apply an SIR to losses that the underlying policies do not cover, and large commercial insureds often carry SIRs on primary coverage.

Other insurance

When two or more policies cover the same loss, the other insurance provision decides how the loss is shared, so that the insured is not paid more than the loss (the principle of indemnity).

Nonconcurrency. Policies are concurrent when they cover the same property, interests and perils on the same terms, differing, if at all, only in their limits. They are nonconcurrent when they cover the same risk but on different terms, such as different property, perils or locations. Nonconcurrent policies make it harder to share a loss, because each insurer’s share turns on what its own policy covers. For example, one policy covers a building and its contents, while a second covers the contents only.

Primary and excess. A primary policy pays first, up to its limits, as though no other insurance existed. An excess policy pays only after the primary insurance is exhausted. For example, when an insured borrows someone else’s car, the owner’s auto policy is primary and the borrower’s own policy applies as excess.

Pro rata. Under pro rata sharing (contribution by limits), each insurer pays the share of the loss that its limit bears to the total of all the limits. If Insurer A’s limit is $100,000 and Insurer B’s is $300,000, A pays one quarter of any loss and B pays three quarters.

Contribution by equal shares. Under contribution by equal shares, each insurer pays an equal amount until the loss is paid or an insurer reaches its limit. Any insurer that still has limit left keeps paying equal shares until the loss is paid. With the same two insurers and a $250,000 loss, each pays $100,000. A has then reached its limit, and B pays the remaining $50,000. The commercial general liability policy uses equal shares when every applicable policy allows it, and pro rata by limits otherwise.

Sidenote

Know this...

Run both methods on the same loss. Limits of $100,000 and $300,000, and a $250,000 loss: pro rata splits it $62,500 and $187,500 (one quarter and three quarters). Equal shares splits it $100,000 and $150,000, because the smaller insurer runs out first.

Named insured provisions

First named insured versus other insureds

A policy may list more than one named insured. The one listed first in the declarations, the first named insured, acts for all of them. Under the common conditions of a commercial policy, the first named insured:

• Is responsible for paying the premium and receives any return premium
• Receives notices of cancellation and nonrenewal, and may cancel the policy for all insureds
• Is authorized to request changes to the policy, with the insurer’s consent

The other named insureds have the same coverage, but these administrative rights and duties run through the first named insured. Others insured under the policy, such as employees under a commercial general liability policy, often have narrower coverage.

Duties after loss

Every policy sets out what the insured must do after a loss, as a condition of coverage. Typical property duties are to:

• Give the insurer prompt notice of the loss, and notify the police if a law may have been broken, such as a theft
• Protect the property from further damage, making reasonable and necessary repairs and keeping a record of their cost
• Prepare an inventory of damaged property, and show the damaged property and produce records as often as the insurer reasonably requires
• Submit to examination under oath if asked
• Send a signed, sworn proof of loss, typically within 60 days after the insurer’s request
• Cooperate in the investigation and settlement of the claim

Typical liability duties are to give prompt notice of an occurrence, claim or suit, send the insurer copies of any demands and legal papers, cooperate with the defense, and not voluntarily make payments or assume obligations, other than first aid, without the insurer’s consent.

Assignment

Assignment is the transfer of a right to another person. Because the insurer chose to insure this insured, the insured may not transfer the policy’s rights and duties to someone else, such as a buyer of the insured property, without the insurer’s written consent. The commercial common conditions make one exception: if an individual named insured dies, the named insured’s legal representative is covered while acting as legal representative.

The right to receive a claim payment after a loss is different. Once a loss has occurred, the insured may generally assign the right to the payment, for example to the contractor making repairs, because doing so does not change the risk the insurer accepted.

Waiver of rights

A waiver is the voluntary giving up of a known right. Two waiver rules appear in most policies:

• Waiver of rights of recovery. After paying a loss, the insurer takes over the insured’s right to recover from whoever caused it (subrogation). Many policies allow the insured to waive its right of recovery against another party in writing before a loss, as businesses often agree to do in leases and construction contracts. (Commercial property forms also allow a waiver after a loss in favor of another insured, an affiliated business or a tenant; a commercial general liability policy uses an endorsement to waive rights against named parties.) Otherwise, after a loss the insured must do nothing to impair the insurer’s subrogation rights
• Waiver of policy terms. A policy’s terms can be amended or waived only by an endorsement issued by the insurer. A producer’s or adjuster’s statement does not change the policy. (Courts may still find that an insurer waived a right by its conduct, or is estopped from asserting it, as covered in the Underwriting chapter.)

Insurer provisions

Liberalization

The liberalization clause gives the insured the benefit of improvements in the insurer’s policy form. If the insurer adopts a revision that broadens coverage without any additional premium, the broader coverage applies automatically to policies already in force, generally including revisions adopted shortly before the policy period began. It does not apply when the insurer introduces a general revision of its program that both broadens and restricts coverage.

Subrogation

Subrogation is the insurer’s right, after paying a loss, to step into the insured’s shoes and recover from the third party responsible for the loss, up to the amount the insurer paid. It keeps the insured from collecting twice, once from the insurer and again from the wrongdoer, and places the cost on the party at fault. The insured must cooperate and may not release the responsible party after the loss.

Claim settlement options

A property policy lets the insurer choose how to settle a covered loss. The insurer may:

• Pay the value of the lost or damaged property
• Pay the cost of repairing or replacing it
• Repair, rebuild or replace it with property of like kind and quality
• Take all or part of the property at an agreed or appraised value

The choice belongs to the insurer, not the insured, and the insurer must tell the insured which option it chooses.

A liability policy gives the insurer the right to investigate and settle any claim or suit at its discretion. The insured’s consent is usually not required. A notable exception is some professional liability coverage, which contains a “consent to settle” clause.

Duty to defend

In a liability policy, the insurer has a duty to defend the insured against any suit seeking damages the policy would cover, even if the suit is groundless, false or fraudulent. The duty to defend is broader than the duty to pay: the insurer must defend as long as the suit claims damages that could be covered.

• The insurer chooses and pays the defense attorney
• In most liability policies, such as the personal auto policy and the commercial general liability policy, defense costs are paid in addition to the limit of liability as supplementary payments, so they do not reduce the amount available to pay damages
• The duty to defend ends when the insurer has exhausted its limit by paying judgments or settlements
• There is no duty to defend a suit seeking damages the policy does not cover

Commercial policy components

A commercial package policy (CPP) combines two or more commercial coverage parts, such as commercial property, general liability, crime and commercial auto, in one policy. A monoline policy has just one coverage part. Either way, the policy is assembled from standard components:

• Common policy declarations, which show the named insured and mailing address, the policy period, a description of the business, and the coverage parts included with their premiums. Each coverage part also has its own declarations
• Common policy conditions, which apply to every coverage part (below)
• One or more coverage parts, each with its own coverage form, conditions and, for property, causes of loss form
• Interline endorsements

Declarations

The declarations identify who and what is insured, the policy period, the coverage parts and limits, and the premium. A package policy has both common policy declarations and the declarations of each coverage part.

Conditions

The common policy conditions apply to every coverage part in the policy:

• Cancellation: the first named insured may cancel at any time. The insurer may cancel with written notice, at least 10 days for nonpayment of premium and 30 days for any other reason under the standard form, unless a state amendatory endorsement changes these terms
• Changes: the policy contains all the agreements between the parties, and its terms can be changed only by endorsement issued by the insurer, at the first named insured’s request with the insurer’s consent
• Examination of books and records: the insurer may examine and audit the insured’s books and records relating to the policy during the policy period and for up to three years afterward
• Inspections and surveys: the insurer may inspect the insured’s property and operations. Doing so does not make the insurer responsible for safety
• Premiums: the first named insured is responsible for paying them and receives any return premium
• Transfer of rights and duties: the insured’s rights and duties may not be transferred without the insurer’s written consent, except to a legal representative on the death of an individual named insured

Interline endorsements

Interline endorsements are endorsements that can modify more than one coverage part of a commercial policy, rather than a single line. Examples include the nuclear energy liability exclusion, terrorism disclosure and exclusion endorsements, and state amendatory endorsements that change a policy’s cancellation terms to comply with a state’s law. Because they can apply to several coverage parts, each one states which coverage parts it modifies.

Lesson summary

• The policy period shows when coverage is in force: occurrence policies cover injury that happens during it, and claims-made policies cover claims first made during it. The policy territory shows where.
• A deductible reduces the insurer’s payment on each loss. A self-insured retention is paid by the insured before the insurer’s obligation begins at all.
• Nonconcurrent policies cover the same risk on different terms. A primary policy pays first and an excess policy pays after it is exhausted.
• Pro rata sharing divides a loss in proportion to each insurer’s limit. Contribution by equal shares has each insurer pay equally until the loss is paid or its limit runs out.
• The first named insured pays the premium, receives return premiums and cancellation notices, and may request changes or cancel for everyone.
• After a loss, the insured gives prompt notice, protects the property, cooperates, and files a sworn proof of loss when asked.
• A policy may not be assigned without the insurer’s written consent. The insured may waive its right of recovery against another party in writing before a loss, and a policy’s terms can be waived only by endorsement.
• Liberalization extends broader coverage to existing policies automatically, at no extra premium.
• In property claims, the insurer chooses the settlement option. A liability insurer has a duty to defend even groundless suits for covered damages, usually outside the limit, until the limit is exhausted.
• A commercial policy has common declarations, common conditions, one or more coverage parts, and interline endorsements, which can modify more than one coverage part.