Practicing attorneys may need to read and critique an insurance policy for a variety of reasons. In litigation, your client may wonder if his liability insurance will properly pay for defense costs and damages. A client might have suffered a loss and then encountered a reluctant claims adjuster: are the coverage denials defensible? A business client might be considering a change of insurance carriers, but is astute enough to know that the policy forms being proposed don’t read exactly the same as the current policy and asks for your analysis. As a practice manager, you might be curious about the details of the insurance program protecting your own business. Here are a few tips about analyzing the coverage elements both features and limitations provided by an insurance policy.
How Policies Are Organized
Almost all Property-Casualty (as distinct from Life, Accident and Health) policies are constructed in a similar fashion. A simple, “Monoline” (providing one “line” of insurance coverage like Workers Compensation, or Professional Liability) policy is composed of:
-Declarations Pages
-Conditions
-Coverage Form
-Endorsements
It is not unusual to encounter a “Package” policy, which provides several lines of insurance coverage (one example would be a Commercial Package policy that insures Commercial Property, Commercial General Liability, Inland Marine and Crime lines). A Package policy has a hierarchical format:
-Common (applicable to the entire policy) Policy Declarations Pages
-Common Policy Conditions
-Common Policy Endorsements
-Individual Coverage Parts (e.g., Property, or Crime), each one of which typically will contain:
- Declarations Pages for that Coverage Part
- Conditions for that Coverage Part
- Coverage Form for that Coverage Part
- Endorsements applicable to that Coverage Part
To Study a Policy, Start with the Declarations Pages
First, look at the name of the insurance company underwriting the policy; if it’s not familiar, go to the web site of A.M. Best Company (the most generally-referred to and respected financial security rating organization).* If the Financial Strength Rating is below A- (or some would say B++), further investigation might be needed into the company’s financials. Depending on the risk being insured, Best’s Financial Size Categories below V (which indicates an Adjusted Policyholder Surplus of at least $10 million USD) might be questioned. The “Outlook” from Best is also important: are the ratings “Stable” or “Under Review Positive Implications” (these are good), or are the ratings “Under Review Negative Implications” (a warning sign)?
Near the top of the Declarations you will find the “Named Insured and Mailing Address.” Check to see if the proper entity is identified accurately. The producing agent or broker will be listed. The Policy Period, usually one year, will be listed. If it is a Package policy, there will be a listing of Coverage Parts that might be included. Even though a Package policy might contain language relating to several coverage parts, a Premium dollar amount must appear on the Policy Declarations page next to that Coverage Part’s listing in order for that Coverage Part’s coverage to be applicable. There should be a Countersignature by an authorized representative of the insurer on the first page.
On the Policy Declarations page you should also find a Forms Schedule which will list all of the Forms and Endorsements that make up part of the policy. Package policies will list Common Policy forms on the main Declarations Pages, and will also list the form number of the various Coverage Parts’ Declarations Pages. Turning to those Coverage Parts Declarations Pages, you will find additional listings of Forms and Endorsements that apply just to each coverage part, respectively. Cross-checking the Forms Schedules with the body of the insurance policy is an important step; if one of the Declarations Pages lists a Form or Endorsement as being part of the policy, and one or more of those forms is missing (or a form appears in the policy that is not listed on any of the Forms Schedules), yellow lights should start flashing and someone should inquire, “What’s up?”
A Location Schedule will appear if an insured is covering operations at multiple sites: is the list complete and accurate? Where involved, there should be a schedule of Mortgagees and Lienholders (either on the Policy Declarations page or the Property Coverage Part Declarations): are they up to date and correctly listed? Sometimes policies cover additional insureds for a variety of reasons: are they correctly identified for all the appropriate Coverage Parts? Is there any conflict between various business contracts’ obligations and how those obligations are handled in the insurance policies?
If a Liability policy incorporates “Claims-made” language, the Declarations Page will list a Retroactive Date (and/or a “Prior and Pending Litigation Date”): are these dates correct (which almost always means, are these dates the same as the inception date when the insured first entered into uninterrupted Claims-made coverage for this type of insurance)? If a “retro date” or a “prior and pending date” has been improperly advanced on a renewal, a coverage gap has been created.
Next, Study the Endorsements and Conditions
After studying the Declarations Pages and checking the Forms Schedules, it might seem counterintuitive to next jump to a policy’s Endorsements instead of reading the Coverage Form or Conditions. Frequently, though, Endorsements replace, delete or add to language that appears in the Coverage Form or Conditions. If an Endorsement says something like, “Part (b) of Exclusion 21 in the General Liability Coverage Part is deleted in its entirety and replaced by the followingÖ.” then I would go to that exclusion (in the Coverage Part) and pencil in a note, reminding myself to later look at “Endorsement #5″ instead of the language originally appearing. It wastes time to study a policy’s core language only to find out later that the language is not applicable, or has been modified, by endorsement.
In a Package policy, pay attention to whether each particular endorsement applies to the entire policy, or just to one or more Coverage Parts contained in the policy.
Common Policy Conditions (as well as Coverage Part Conditions) are critically important components of an insurance policy; they are overlooked or ignored at the peril of the insured. The Conditions talk about how and when coverage will be applied, and how it will operate under special situations. To get an idea of the sort of subject matter contained in policy conditions, here are the section headings in the Commercial Property Conditions (ISO form CP 00 90):
-Concealment, Misrepresentation or Fraud
-Control of Property
-Insurance Under Two or More Coverages
-Legal Action Against Us (the insurance company)
-Liberalization
-No Benefit to Bailee
-Other Insurance
-Policy Period, Coverage Territory
-Transfer of Rights of Recovery Against Others to Us
Any attorney can appreciate the import of topics like these.
Now Read the Coverage Form(s)
The Coverage Forms themselves make up the heart of any insurance policy, and I suggest you study them last, after reviewing their contractual context (the Declarations, Endorsements and Conditions). The main elements of a Coverage Form will vary by line of insurance, but you will find many of the following main sections in any Coverage Form:
-Coverage (sometimes called “Insuring Agreement”)
-Causes of Loss
-Exclusions
-Definitions
-Who Is an Insured
-Additional Coverages
-Extensions of Coverage
-Limits of Insurance
-Deductible
-Coinsurance
-Supplementary Payments
-Duties in the Event of Loss
-Conditions (applicable to just this Coverage Form)
Using these main headings for guidance, a reader can easily find the particular points that need to be communicated to clients about their insurance policies. Each section is contractually important, and many reference or modify other sections. For example, some peril or event may appear to be “covered” by reading the Insuring Agreement, but further study will reveal that certain particulars are limited or excluded by other sections.
Understand The Advantages Of Both Standard and Non-standard Policy Language
Unless there are compelling business reasons to do otherwise, insurance companies prefer to use industry-standard Forms and Endorsements in their policies. This is because there are years (sometimes decades) of precedent and court decisions that have established precisely what certain insurance policy language does, and does not, provide.
For those familiar with the insurance industry, standardized, widely-used policy Forms and Endorsements make it comparatively easy to analyze policy coverages. The most common forms in use in the United States today are provided by Insurance Services Office, Inc., or ISO. The second most widely used source of “standard” policy wording, used by more than 600 insurance companies, comes from American Association of Insurance Services, or AAIS. Any veteran of the commercial insurance business in the US will be very familiar with the wording, structure and import of a standard Form like ISO’s “Commercial General Liability Form” ISO Form #CG 00 01.
ISO and AAIS will modify and update various elements of various Forms from time to time; sometimes knowing the “edition date” of a Form is an important analytical element. The complete numerical designation of an ISO Form will look like “CG 00 01 12 04″ the last four digits refer to the edition date of that Form’s language (in this case, the December, 2004 Edition). AAIS and many other companies put the edition date in parenthesis following the Form number (“AG 100 20 (10/94″).
It may be that the exact type of insurance coverage that an underwriting company wants to provide may not be practicable to deliver using standardized Forms. For example, Directors and Officers Liability policies’ wordings are not standard from company to company; rather, one company (Chubb, for example, or Travelers) will develop its own wording for policy Forms of this type, and it will use this internally-standardized wording for most or all of its customers for this line of insurance. When the language details of such policies differs among companies for the same line of insurance, more care obviously needs to be given to reading every line and noting the differences (and analyzing the import of those differences).
If even a company’s own proprietary policy language cannot meet the needs of a particular insured, and if that insured is important enough to the insurer, an underwriting department can sometimes be persuaded to “manuscript” policy language that meets these refined needs. This type of manuscripted wording has usually never been tested by the courts. If your client is in a position to need such insurance policy customization, he or she might be well advised to bring you into the discussion with their underwriters to help make sure that the language winds up having the desired and intended effect.
Insurance policies are contracts, but they occupy a special niche in the wide field of contracts; knowing how to read and analyze them will be important for most attorneys.
*On your first visit to A.M. Best’s web site, you’ll be asked to register, providing your e-mail address and a password you select. Near the upper left-hand corner of the home page, enter the insurance company’s name, exactly as it appears on the policy, in the “Ratings and Analysis” box. On the Search Results page that appears, click on the insurance company’s name – this will take you to the Best rating for that company – including the Financial Strength Rating, Financial Size Category, and the Outlook.
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