Anatomy of An Insurance Policy

A typical insurance policy is not a single, cohesive document that can be read start to finish. Instead, it is a grouping of independent documents that all work together to define the insurer’s and the insured’s obligations under the insurance contract.  Understanding an insurance policy requires an understanding of all the different pieces that make up the policy, and how those pieces relate.

Quotes & Binders.  A quote is a summary of a proposed policy’s coverages and pricing, issued before a policy is purchased. Quotes are not binding, and typically do not affect the insurance policy’s coverages or interpretation.  A binder is a document confirming that an insurance policy has been purchased.  Although a binder is evidence of the existence of an insurance contract, like a quote, it is not a part of the insurance policy, and the information on the binding is typically not binding on the insurer or the insured.

Policyholder Notices.  When you receive a stack of documents that form an insurance policy, those documents will typically include a series of policyholder notices. Like quotes and binders, policyholder notices are not part of the insurance contract, and they do not usually affect the coverages provided under the contract.

Declarations.  Policy declarations are at the heart of an insurance contract, and the declarations are where the essential, non-boilerplate terms of the policy are found.  Declarations frequently identify the following: insurer; insured; policy limits; deductibles/SIRs; and forms attached at inception.

Note that, in a package policy, you may find declaration pages scattered throughout the document; there may be an overall declaration at the beginning of the policy, followed by generally applicable policy forms; then there may be separate declarations applicable only to the property coverages; another set of declarations pages later on applicable only to the auto coverages; and yet another set of declarations applicable only to liability coverages.

Coverage Forms.  The coverage forms are typically pre-printed forms that set forth the policy’s coverages and exclusions. Important information in the coverage forms includes information such as the coverage grant; coverage trigger; and policy definitions. The coverage forms are also where you’ll find initial information regarding what is covered, and what is excluded.  Be careful, though – coverage forms are often modified by endorsements!

Endorsements.  Almost all insurance policies contain endorsements. These are forms that are attached to the policy that modify the coverage provided under the coverage forms. Endorsements allow insurers to use off-the-shelf forms in their policies, but still tailor coverages to their specific clients and risk preferences.

Some endorsements are attached at inception, meaning that the policy as originally issued contained those endorsements. Other endorsements are added later, after the policy is issued. It is important to know the effective date of any endorsement that may affect coverages you’re reviewing.

Because endorsements modify the language of the coverage forms, most courts interpret endorsements as a sort of “trump card;” that is, if there is a conflict between a coverage form and an endorsement, the endorsement generally controls if the two forms cannot be harmonized.

Forms In Package Policies.  In a package policy, it is extremely common for some coverage forms and endorsements to apply to certain coverages, while other forms and endorsements apply to other coverages.  When considering a provision in any portion of an insurance policy, a threshold question is: Does this form or endorsement apply to my coverage? For example, if you are investigating a client’s liability coverage, and you come across a form stating you must sue the insurer within two years of the date of loss, you may panic because you missed that contractual limitation deadline. However, if you read the form carefully, you’ll likely discover that provision applies only to property coverages, and not to liability coverages.

Photo courtesy JOE WU.

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