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Frequently Asked Questions

Question

How do I review my organization's insurance contracts?

Answer

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An insurance policy is a contract that defines the obligations of the two parties involved, the insured (your organization) and the insurer (insurance company). Most non-insurance people believe that insurance policies are incomprehensible. However, with a little insight into the mysteries of insurance contracts, you can make sense of your policies. Remember that besides providing coverages, policies also assign certain responsibilities to the insured. If you do not meet your obligations, you may impair the policy's coverage. The following review process will help guide you through the maze of insurance contracts.

Policy Parts

Every insurance policy has four parts: Declarations, Insuring Agreements, Exclusions, and Conditions. Use these sections as guideposts in reviewing a policy. Examine each part to identify its key provisions and requirements. You need not undertake this process alone. Remember that your insurance advisor, whether an agent, broker or consultant, can be a valuable resource in analyzing your organization's policies.

Declarations
The Declarations or "dec" page is usually the first page of the policy. It summarizes key information specific to the policy. The dec page shows the insured's name and address, the policy dates, a brief description of the business, coverages provided, coverage limits, premiums and the forms applicable to the policy.

Beyond the Declarations, the policy will also contain "schedules." A schedule identifies the location(s) of the insured's operations (including values or limits), the various assigned rating classifications, the rates and rating basis, and any special property covered (cameras, fine arts, contractors' equipment, etc.).

Insuring Agreements
The Insuring Agreements specify what the insurance company has agreed to pay for or to provide in exchange for the premium. Often a policy contains a section clearly marked "Insuring Agreements," although there may be additional agreements buried in the policy. Also, the policy may call an insuring agreement a "coverage" and many policies include more than one coverage. For example, a commercial general liability policy may provide Coverage A - Bodily Injury and Property Damage, Coverage B - Personal and Advertising Injury, and Coverage C - Medical Payments. Policies also call insuring agreements Supplemental, Additional or Extended Coverages.

An insurance policy begins by declaring what it covers and then proceeds to restrict, limit and exclude coverages. Therefore, you cannot just read the insuring agreements to understand the coverage. You must read the entire policy and refer back to the various insuring agreements and other provisions. Patience and a clear head are invaluable tools as you undertake this process.

One insuring agreement that is often easy to identify explains what triggers the policy's coverage. The two possible coverage triggers are "occurrence" or "claims made." Under an occurrence policy, the policy "triggers" or provides coverage based upon when the loss occurred. If the loss occurred during the policy's period, the policy will cover the loss. For example, if the policy period is January 1 - December 31, 1999 and a loss occurs in June 1999, barring the denial of the claim for other reasons, the policy will cover the loss. If the policy initiates coverage by a claims made provision, the policy in force when the insured submits the claim is the policy that responds. For example, assuming the same policy period as before, an organization reports the filing of a wrongful termination suit on January 10, 1999. The suit alleges that the organization terminated the employee on December 31, 1998 (one day before the policy took effect) for unlawful reasons. Assuming the company does not deny the claim for other reasons, the reporting of the "claim" during the policy period triggers the coverage. The policy responds despite the fact that the alleged wrongful act (the termination) took place before the policy was in effect. Claims made policies include many provisions that impact coverage and the implications of timely reporting of claims are quite complex. If your policy is claims made, ask your insurance advisor to explain the policy.

Definitions
Insurance policies contain many common words that have special meaning within the context of insurance. The policy identifies these words usually by bold print or quotation marks. Most policies contain a section entitled "Definitions" where they explain the special meaning of the designated words. Since definitions may restrict or limit coverage, it is essential that policyholders read definitions carefully and seek clarification whenever a definition it unclear.

Exclusions
Every insurance policy has exclusions or policy provisions that eliminate coverage for specified exposures. Exclusions serve as a way to clarify the coverages granted by the policy. Most policies have a section entitled, "Exclusions." However, an exclusionary provision can be anywhere in the policy. Furthermore, an exclusion may also contain a broadening provision. In the commercial general liability policy, the Aircraft, Auto, or Watercraft Exclusions eliminate coverage for the ownership, maintenance, use or entrustment of these vehicles or vessels. However, the exclusion has five exceptions where the policy covers watercraft such as while ashore on your premises and for certain nonowned watercraft. Read the policy carefully and note the provisions that apply to your operations.

Conditions
Conditions within an insurance policy qualify the various promises made by the insurance company. The insurer does not promise to cover all losses. The company will impose certain requirements or conditions on the insured, such as premium payment or duties to follow after a loss. Another example is that the insurer promises to pay and provide other services only if the insured event occurs and the insured has fulfilled its contractual obligations. Review the policy to identify the conditions that you must follow. If you do not meet your obligations, the policy can void or otherwise restrict coverage.

The Review Process

Review your organization's insurance policies when you receive them. Before buying any new coverage, always request and review sample policies. Many people find it difficult to fully understand the scope of coverages without considering a specific loss. One approach is to identify the risks or types of losses you expect your organization to experience -- an office fire, windstorm, injury (suffered by an employee, volunteer, client), auto accident, theft or other risks. Then, determine if you think the policies will cover these expected losses. Your insurance advisor can assist you in the review process. Here are the steps.

Review the policy for accuracy.
Insurance companies are notorious for issuing policies incorrectly. The policy may contain spelling errors, the wrong Named Insured, incorrect additional insureds, the wrong forms or not include a purchased coverage. Refer any errors to your insurance agent or broker immediately. If you do not address an error, it can become a problem if a loss related to the error occurs.
Review the rating classifications and other schedules.
Check to see what rating classifications the company assigned to your organization. The company calculates the premium charge based on certain rating classifications. There can be substantial differences in the rates among the classifications. One insurance company assigned a "circus" rating classification to a workers' compensation policy for a nonprofit sports organization. The circus rates were much higher than the appropriate classification of "outside sales" and did not reflect the insured's exposures. Ask your insurance advisor to explain any classifications that do not seem to describe your operations.
Read the policy and answer these questions.

Summary

An insurance policy is a complex contract that often contains conflicting and confusing provisions. With a little patience and practice, you can learn to understand your policy's format and coverages. As a legal document, the courts have scrutinized insurance policies and argued over their meaning. Consequently, various courts have rendered conflicting interpretations. If judges and juries continue to disagree about the meaning of insurance policies, how can a nonprofit manager be confident about the coverages he or she has purchased? Most losses do not involve complex policy interpretations and the insurance company and insured quickly agree that the policy covers the loss. However, you must know and understand the many responsibilities placed on your organization by an insurance policy. Your noncompliance with a policy provision could have an adverse impact on coverage. So sit back, relax, and try to enjoy the learning process.

WHERE TO GO FOR MORE INFORMATION

Am I Covered For . . . ? A Guide to Insurance for Non-Profits, Lai, Mary L., Chapman, Terry S., and Steinbeck, Elmer L., Consortium for Human Services, Inc., San Jose, 1992. Available from the Nonprofit Risk Management Center.

Nonprofit Risk Management Center