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.
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.
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
Specific, scheduled and blanket insurance
A policy can apply its amount of insurance to property in different ways:
- Specific insurance applies a separate amount of insurance to one item, one building or one location. A dwelling policy with a stated limit for the dwelling at the described location is specific insurance.
- Scheduled insurance lists the covered items individually, each with its own description and amount of insurance. A scheduled personal property endorsement, which lists jewelry, furs, fine art or similar items one by one, is scheduled insurance.
- Blanket insurance applies one amount of insurance across several items, several kinds of property or several locations, without dividing it among them. A homeowners Coverage C limit, which covers all the insured’s unscheduled personal property under one amount, works this way.
Third-party provisions
Some policy provisions protect, or deny protection to, people who are not the named insured but have an interest in the insured property.
Standard mortgage clause
When a home is financed, the lender (the mortgagee) is named in the policy, and the policy’s mortgage clause protects the lender’s interest. Under the homeowners and dwelling forms:
- A covered loss to the dwelling or other structures is paid to the mortgagee and the insured, as their interests appear. If more than one mortgagee is named, they are paid in the order of precedence of their mortgages.
- If the insurer denies the insured’s claim, that denial does not apply to a valid claim of the mortgagee, as long as the mortgagee:
- Notifies the insurer of any change in ownership, occupancy or substantial change in risk it knows of
- Pays any premium due on demand if the insured has neglected to pay it
- Submits a signed, sworn statement of loss within 60 days after the insurer notifies it that the insured has failed to do so
- If the insurer cancels or does not renew the policy, the mortgagee is notified at least 10 days before the cancellation or nonrenewal takes effect.
- If the insurer pays the mortgagee but denies payment to the insured, the insurer is subrogated to the mortgagee’s rights under the mortgage, or it may pay off the whole principal and accrued interest and take an assignment of the mortgage.
The mortgagee’s protection is the clause’s defining feature: the lender is paid even when the insured’s own claim is denied, for example because of the insured’s concealment or fraud.
Loss payable clause
A loss payable clause protects a person with a financial interest in specific personal property, such as a lender that financed it. Under the homeowners and dwelling forms, if the declarations show a loss payee for certain listed personal property, that person is considered an insured with respect to that property, and is notified in writing if the insurer decides to cancel or not renew the policy.
Unlike the mortgage clause, the loss payable clause does not promise that the loss payee will be paid when the insured’s own claim is denied.
No benefit to bailee
A bailee is a person or business that holds someone else’s property, such as a mover, a storage company, a dry cleaner or a repair shop. Property policies refuse to let a bailee for hire benefit from the owner’s insurance:
- The homeowners and dwelling forms will not recognize any assignment or grant any coverage that benefits a person or organization holding, storing or moving property for a fee.
- The personal auto policy’s physical damage coverage states that it shall not directly or indirectly benefit any carrier or other bailee for hire.
So if a moving company damages the insured’s furniture, the mover cannot claim the owner’s homeowners coverage as a substitute for its own liability. The owner’s insurer may pay the owner and then pursue the mover through subrogation.
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.
- Specific insurance puts a separate amount on one item or location, scheduled insurance lists items individually with their own amounts, and blanket insurance applies one amount across several items or locations.
- The standard mortgage clause pays the mortgagee even when the insured’s claim is denied, if the mortgagee reports changes in risk it knows of, pays premium on demand and files a proof of loss within 60 days when the insured does not. The mortgagee gets 10 days’ notice of cancellation or nonrenewal.
- A loss payee for listed personal property is treated as an insured for that property and is notified of cancellation or nonrenewal.
- No benefit to bailee: the owner’s policy never benefits a person holding, storing or moving the property for a fee.