Chapter 2: Policy Provisions

Key Definitions

Appraisal

A professional assessment to determine the extent of damage.

Example: After a fire, an appraiser inspects your home to determine $75,000 in damage.

Earned Premium

Portion of premium that now belongs to the insurer because it applies to elapsed time.

Example: Pay $12,000 annually upfront. After 1 month, insurer has "earned" $1,000 (1/12th).

Liberalization

Removal or loosening of restrictions. Allows insurers to update clauses benefiting the insured automatically.

Example: Insurer improves coverage terms - you get the benefit automatically without requesting it.

Negligence

Failure to use care that a reasonable, prudent person would under the same circumstances.

Policyowner

The person entitled to exercise rights and privileges in the policy.

Third Party

Anyone other than the two main parties (insured and insurer).

Example: You hit someone's car - that person is the third party.

Underwriting

Risk selection - reviewing applications to determine eligibility for coverage.

Example: Underwriter reviews your driving record to decide if you qualify for auto insurance and at what rate.

Policy Structure Components

1. Declarations (Dec Page)

Usually the FIRST PAGE - contains basic underwriting information.

Includes:

• Insured's name & address
• Amount of coverage
• Premium amounts
• Description of insured location
• Policy period dates
• Supplemental representations

2. Definitions

Clarifies terms used in the policy. Words in bold, italics, or "quotations" typically have specific definitions.

Example: "Residence premises" might be specifically defined as "the dwelling where you live" - important because coverage may not apply elsewhere.

3. Insuring Agreement

Establishes the insurance company's obligation to provide coverage.

Contains:

• Parties to the contract
• Effective and renewal dates
• Description of coverage provided
• Perils covered

Usually found after Declarations (may be after Definitions).

4. Additional Coverage (Supplementary Coverage)

Extra coverage for specific loss expenses at NO additional premium.

Examples:

• Lawyer fees for covered liability case
• Temporary repairs (tarp over hole from fallen tree)
• Debris removal costs
• Fire department service charges

5. Exclusions

Details what perils are NOT covered and who is NOT insured.

Common Exclusions:

• Earth movement (earthquakes, mudflow, volcanic eruption)
• Flood water
• Water backup or sump pump failure
• Underground water
• Intentional acts
• War and nuclear hazards

6. Endorsements (Riders)

Addendums that change the policy's original terms, conditions, or coverages.

Requirements to be valid:

• Must be in writing
• Must be attached to policy
• Must be signed by executive officer of insurer

Can be added at policy inception or during the term.

7. Policy Limits (Limitations)

The maximum amount an insured may collect or be protected under the policy terms.

Example: Policy limit of $300,000 means the most you can recover is $300,000, even if your loss is $400,000.

Policy Conditions

Rules both the insurer and insured must follow based on policy terms.

Inspections

Insurer may inspect the insured location or books to determine exposure for underwriting and rating purposes.

Changes to Policy

Must be made by the insurer and be in writing.

Liberalization Clause

Improved coverage provided free of charge - insured gets new benefit automatically.

Return of Premium

Dictates method used to calculate premium refund if cancelled before expiration date.

Duties After a Loss (Insured's Responsibilities)

Important: Failing to fulfill these duties may result in claim denial!

1

Protect Property from Further Damage

Take reasonable steps to prevent additional loss (cover broken windows, turn off water, etc.)
2

Begin Inventory Count

Document all damaged property with descriptions, quantities, and values.
3

Cooperate with Insurer

Work with the insurance company in settling the loss.
4

Contact Police (if theft)

Report theft losses to law enforcement.
5

Submit Proof of Loss

Provide a signed, sworn proof of loss within the specified timeframe after insurer requests it.

Claims & Settlement

Proof of Loss

A sworn statement from insured to insurer that includes:

Description of what happened
Date of occurrence
Amount of indemnity claimed

Arbitration

A third party helps decide a claim dispute between insured and insurer.

Binding

Cannot appeal - decision is final

Non-Binding

Can still go to court if unsatisfied

Loss Settlement Methods

How claims are paid:

Actual Cash Value (ACV)

Replacement cost minus depreciation. What the item is worth TODAY.

Replacement Cost

Cost to replace with new item of like kind and quality - no depreciation deducted.

Agreed Value

Pre-determined value agreed upon by both parties at policy inception.

Other Insurance Provision

Determines how insurance responds when multiple policies cover the same loss.

Example: If you have two auto policies, this provision determines which pays first or how they share the loss.

Consent to Settle

Found in professional liability policies - insurer must seek insured's consent before settling a claim for a specific amount.

Cancellation & Nonrenewal

Cancellation

Termination of a policy BEFORE the expiration date.

Can be:

• Voluntary - Insured requests cancellation
• Involuntary - Insurer cancels (non-payment, fraud, etc.)
• Mutual - Both parties agree

Nonrenewal

Termination at expiration date by not offering a continuation or replacement.

Different from cancellation because the policy runs its full term first.

Occurrence vs. Claims-Made Policy Forms

Key Concept: These determine what "triggers" coverage!

Occurrence Form

STANDARD for Most Policies

Trigger: When did the damage/accident HAPPEN?

Example:

Homeowners policy from 2020-2021. In 2025, you discover a leak from 2020 caused $50k in mold damage.

✓ The 2020 policy WILL pay - because the damage OCCURRED in 2020.

Key Point: Only matters WHEN the damage happened.

Claims-Made Form

MAINLY for Business Liability

Trigger: When was the CLAIM FILED?