Tips for Reading Your Insurance Policy

 

Every small business/nonprofit leader must account for the risks that come with operating their enterprise; some leaders opt to mitigate certain risks by purchasing insurance policies. Because insurance policies are legal contracts[1], insurance companies aim to write these policies such that they are completely unambiguous (especially since courts will interpret any ambiguities against the insurance company[2]). Somewhat ironically, though, insurance companies achieve “unambiguity” in their policies by using a lot of words, many of which are unfamiliar to most readers. Insurance policies are thus infamously difficult for most people to wrap their heads around[3]. The tips that follow, though not exhaustive, will give you a “springboard” toward understanding your policy and what it covers (and, perhaps even more importantly, what it doesn’t cover).

When in doubt, talk to your insurance broker or another expert. The tips below are meant to be generally applicable. If, after reading your policy, you have particular questions concerning how the policy applies to your enterprise, you’d be wise to consult your insurance broker or another insurance expert (such as an attorney).

 Identify who is considered an “insured.” This is one of the first things you should do as you begin reading your policy[4]. Your insurance policy will only provide “coverage” if the person/entity causing or suffering damage is an “insured.” So, for example, if your employee were to accidentally injure a customer and get sued, you’d want to make sure that employee was an “insured”; if your enterprise’s computers were damaged in a fire, you’d want to make sure those computers were “insured.” Your policy may designate “insureds” in a few ways:

·       Named Insured: a policy’s “Declarations Page” (which typically comes at the beginning of the policy) will indicate the “Named Insured”: 

 

·       Elsewhere: additionally, the policy may designate other insureds. The policy may do this in the “Definitions” section or in a standalone section, as shown here:

Understand what “coverage” entails. When an insurance policy does apply to some accident, we say that accident is “covered.” But what exactly does “covered” mean? You’ll need to consult your policy to answer this question, but commonly, “coverage” in the liability context[5] means that the insurance company will 1) pay any damages you are ultimately held responsible for and 2) pay for an attorney to defend you in court (and pay other related legal fees): 

 

·       A note on legal fees. You may need to face lawsuits that are “without merit,” meaning the lawsuit will not lead to you paying damages[6]. But even if a lawsuit is without merit, you will still need to hire an attorney to defend you against the lawsuit. Given how expensive attorneys’ services can be[7], an insurance provision that “covers” legal fees may be more valuable than meets the eye.

·       Limits of Insurance. Even if an accident is “covered” and your insurance company pays you in relation to the accident, your insurance company will likely only pay up to a certain amount. These amounts are typically announced on the Declarations Page:   

  The relationship between the Insuring Agreement and Exclusions

·       The Insuring Agreement announces what the policy covers. The Insuring Agreement will typically be drafted in very broad terms.

·       Exclusions come after the Insuring Agreement, and list circumstances under which the policy will not apply despite the terms of the Insuring Agreement. Exclusions narrow a policy’s coverage bit-by-bit, so that once the Exclusion dust settles, your coverage may in fact be significantly narrower than the Insuring Agreement would lead one to believe.

The importance of Definitions. Most of the words you’ll read in your insurance policy mean, well, what they’re generally understood to mean. But beware: your policy will almost certainly designate certain, special terms to mean precisely what they are said to mean in the “Definitions” section. Your policy could indicate this designation in a variety of ways, for instance by:

• Capitalizing the special term [Special Term or SPECIAL TERM]
• Bolding the special term [special term]
• Italicizing the special term [special term], or
• Quoting the special term [“special term”].  

As you read the Definitions section, you may realize that a special term has a definition that 1) is not obvious from the term itself and/or 2) significantly affects the policy’s scope of coverage. A special term’s definition may even rely in turn on other special terms’ definitions. Consider, for example, a policy that covers all “Wrongful Acts” but defines “Wrongful Acts” as follows:

The importance of Endorsements. Endorsements can be easy to overlook—what even are they, and if they’re so important, why do they come at the tail end of an insurance policy? Well, endorsements are actually quite important, because they’re additional clauses that change the meaning and content of the policy itself. For example, consider this endorsement that changes “alleged Bodily Injury or Property Damage…” to “alleged Property Damage…,” thereby enlarging the scope of coverage (because damages arising from Bodily Injury are no longer excluded in light of the endorsement): 

 Finally, be aware of your obligations. Your insurance policy will primarily discuss the insurance company’s obligations (under what circumstances will they pay, who will they pay, and how much?). But take special note when your policy announces that you have an obligation. For example, you may be required to cooperate with the insurance company as they defend you in court, or allow the insurance company to examine your books/records. Perhaps most commonly, though, your policy will outline how you must report a claim. If you fail to report a claim in the manner outlined by your policy, your insurance company may have grounds to deny the claim. 

 

 By Josh Krivan

 

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[1]See, e.g., Rory v. Cont'l Ins. Co., 473 Mich. 457, 461 (2005) (“We hold, first, that insurance policies are subject to the same contract construction principles that apply to any other species of contract.”).

[2] See, e.g., Raska v. Farm Bureau Mut. Ins. Co. of Michigan, 412 Mich. 355, 362 (1982) (“If a fair reading of the entire contract of insurance leads one to understand that there is coverage under particular circumstances and another fair reading of it leads one to understand there is no coverage under the same circumstances the contract is ambiguous and should be construed against its drafter and in favor of coverage.”).

[3] See Christopher Elliott, Why Are Insurance Policies Impossible to Read?, Forbes Advisor (last updated Sep. 2, 2020, 3:40 AM), https://www.forbes.com/advisor/car-insurance/insurance-policies-impossible-to-read/.

[4] See Chris Boggs, How to Read an Insurance Policy, Independent Agent (Aug. 1, 2019), https://www.iamagazine.com/magazine/issues/2019/august/how-to-read-a-policy-11-easy-to-follow-rules.

[5] “Liability” coverage applies when your enterprise harms a third party, rather than the other way around.

[6] Claimants bring “meritless” lawsuits for various reasons. A claimant may be mistaken as to what happened, mistaken as to how the law applies, or hoping to extract a small payment from the defendant by being a “nuisance.”

[7] See How Much Do Lawyers Charge in Michigan?, Clio (last visited Mar. 21, 2022), https://www.clio.com/resources/legal-trends/compare-lawyer-rates/mi/.