Many people find insurance policies to be unbearably complex documents, and not without reason. These contracts often appear to be piles of forms with impenetrable legal jargon and terms of art, with no clear order among them. This is true of all sorts of insurance policies, whether they are the homeowners, health or auto policies of individuals, or the Comprehensive (or Commercial) General Liability (“CGL”), Directors & Officers Liability, Commercial Property, Workers’ Compensation/Employer’s Liability, or Professional Liability policies purchased by businesses.
There is a method to the jumbled madness, however, and with the five easy steps below, the meaning of the pricey contract you bought will come into focus. While there is no substitute for the professional advice of attorneys and insurance professionals in this area, a little direct familiarity with your insurance policy will help you receive more benefit from that advice and from the policy itself.
Step 1: Swiss Cheese. Yes, I said Swiss Cheese. That’s the physical model you should have in mind when reading any insurance policy, no matter the type of coverage. Make sure it’s a slice, and not a block or a wedge. The cheese is your coverage; the empty spaces around it and within it are noncoverage. Don’t worry, this will make more sense in a moment.
Step 2: The Rectangular Border. The outer edges of the cheese slice represent the greater universe of coverage available to you, and the text of the policy corresponding to those edges is the “insuring agreement” or “coverage grant” (the phrases are used interchangeably). Usually you can find the insuring agreement at the beginning of the longest individual form within your policy. The insuring agreement is the insurer’s first and main promise to you, the promise to “pay,” to “indemnify,” or to “defend and indemnify,” and everything else in the policy is derivative or qualifying of it. If the policy were knighthood status, the insuring agreement would be the king or queen’s ceremonial sword tapping your shoulder as you receive your new title. Before then, you were just a commoner, that is, an uninsured.
There may be more than one insuring agreement in your policy. Homeowners policies, for example, typically contain both property and liability coverages. Where that is true, you should examine the coverages separately, as if they are independent policies, even though the two (or more) coverages in the policy may share certain endorsements or other forms.
Insureds too often get carried away with the overall size of their cheese slice, or the word “pay,” and want to jump immediately to the conclusion that they’re covered unless an exclusion says otherwise (yes, the exclusions are the holes in the cheese, but stop getting ahead of me). Unfortunately, the insuring agreement itself is limited in scope and the limitations present a number of frequently litigated coverage issues.
In CGL policies, for instance, there is plenty of room to fight over (1) whether a particular event constitutes an “occurrence” (typically defined as an “accident”), (2) whether the results of the event constitute “bodily injury” or “property damage,” and, if they do, (3) when, relative to the policy period, the bodily injury or property damage took place. While policies generally define the relevant terms, the definitions themselves leave room for debate, and even courts aided by the definitions often disagree over the policy’s meaning.
Similarly, in property policies, insurers and insureds often spar over what should be deemed “covered property” or a “covered cause of loss,” or when property damage occurred.
The crucial point is that the outer edges of the cheese slice are meaningful, even if there are lots of disagreements on the precise location of those edges. Do not jump immediately to the exclusions, discussed below, when trying to figure out if you’re covered for something. If the claim or loss with which you are dealing with falls outside the edges of the slice, you are not covered, end of story.
Step 3: The Holes. The holes in the cheese slice represent the exclusions. Once you have decided that your loss or claim falls within the insuring agreement, your next analytical step is to see whether it falls farther, straight through a hole to the hungry mouse waiting below you, who had kind of been hoping for the cheese.
The main coverage form of your policy – the same form in which you found the insuring agreement – will generally contain most of the exclusions, but additional exclusions, or amendments to exclusions, are likely to be in endorsements.
Exclusions come in a lot of flavors, but there are some common ones you can expect in just about any policy. The most common exclusion, usually the first or second one listed, is for expected or intended harm. This makes intuitive sense, as most people understand that an insurance policy is designed to cover risk, not a fait accompli. In liability policies, this exclusion overlaps conceptually with the idea of an “occurrence.”
Pollution exclusions are very popular among insurers since Congress and state governments began imposing strict liability on polluters a few decades ago. These exclusions are also very unpopular with insureds, so there has been much litigation over them and subsequent re-wording by insurers. The wording matters, a lot. Check it in consultation with your attorney or insurance professional against the law applicable to the policy.
Property coverage policies have exclusions both for certain causes of loss and certain types of property. What is damaged and how it was damaged must be examined against the policy language. In some cases, you will wish you had not elected out of the meteorology elective you almost took in college, as the distinctions among flood water, rain water, wind and wind-driven rain become paramount.
Liability policies are laden with exclusions designed to make clear that the insurer is not a guarantor of the insured’s product or work, though the insurer will cover secondary losses from the product or work. These exclusions, often called “business risk” exclusions, overlap conceptually with the notion of “property damage,” as the latter assumes that the property at issue was undamaged at some relevant time and became damaged during the policy period.
Step 4: The Glass Dome on Top. You didn’t expect the cheese to sit out in the open air to rot, did you? No, there is a protective glass dome on top of it, and the dome corresponds to the policy’s conditions. The conditions are there to make sure that the cheese is not accessed for frivolous or unjustified reasons. You have to fulfill the conditions to open the protective glass and get to the cheese.
Some of those conditions relate to the timing of notice of the claim or loss, and others relate to cooperation or the submittal of a proof of loss. There are conditions concerning timely premium payments and the fulfillment of other coverage prerequisites. A good insurance agent or a lawyer will guide you through these requirements.
Step 5: The Accoutrement. The coverage grant, exclusions and conditions addressed above form the main part of any policy, but they do not operate in a vacuum. As mentioned, definitions help to guide the insured in understanding of the various terms used. Endorsements may add to, subtract from or modify the contract. Within the exclusions (the holes), may be exceptions to the exclusions (islands of coverage within the empty space). The declarations page, schedule of underlying insurance (if any), schedule of forms, limits of insurance, list of named insureds, and other forms appended to the policy must all be considered.
In the event of a serious coverage issue with your insurer, it’s time to call in the assistance of your insurance agent, an attorney or another qualified insurance professional. My hope is that this article will help you benefit from that assistance more fully and allow you to receive the full benefit of the coverage for which you bargained.
If you have health insurance and have been putting off a colonoscopy, mammogram or other test, you now have one less excuse.
