Necessary evil.
Commodity.
These descriptions convey the disdain many feel when paying insurance premiums. However, the most common financial transfer mechanism is an insurance transfer. Insurance allows an organization to transfer the financial consequences of a loss, especially a catastrophic loss, to an insurance carrier. The carrier pays policyholders for losses and, in turn, distributes the cost of all losses among policyholders.
The insurance policy is an agreement in which the insurance carrier promises to pay claims in exchange for premiums paid by the policyholder. Ultimately, it’s a legal contract between two parties.
Components of a policy
The policy is constructed to outline the terms and conditions of the contract, including the obligations and rights of each party. This is true whether the policy is a package (usually covering property, general liability, auto, etc.) or monoline (workers’ compensation/employers’ liability, professional liability, etc.).
Whether package, monoline or a combination, an insurance program has three components — common policy declarations, common policy conditions and coverage parts or lines of business.
Common policy declarations
The common policy declarations, or “dec” page, is often overlooked. However, it can make or break an insurance claim. In addition to the premium, the dec page provides critical information.
* Named insured and insurance company. The parties entering into the contract.
* Agent or broker. The “producer” who brought the two parties together and facilitated the execution of the contract.
* Effective date and expiration of the policy. Defined dates on which coverage begins and expires. Subject to terms and conditions of the policy, coverage will be determined based on the timing of the occurrence relative to the policy term.
Common policy conditions — read them
The standard insurance policy extends specific rights and duties to the named insured. These conditions establish fundamental ground rules for both parties of the contract — policyholder or named insured, and carrier.
Many of these conditions are contained in a common document that applies to all coverage parts. In addition to the underlying right to coverage (including indemnity and defense), the named insured’s traditional rights include the right to cancel the policy, the right to receive cancellation or nonrenewal notification from the carrier, the right to change the policy and the right to receive return premium.
Basic duties of the named insured include paying premium and submitting to examination of books and records and/or inspections and surveys (at the request of the carrier).
Who’s on first?
Often, an insurance policy will contain more than one named insured. The common policy conditions make it very clear that the rights and duties pertain to the first named insured — literally, the first name listed in the declarations.
It is important to consider whether the first name is appropriate for a given right or duty. Also, note that the insured cannot transfer the rights or duties under the policy to any other person or organization without the written consent of the carrier.
Additional insurance policy components
Each coverage segment includes its own set of forms that allow you and your insurance agent to construct the desired policy terms and conditions. These forms define key terms and conditions, including the insuring agreement, causes of loss, exclusions, definitions and specific line of business conditions.
Besides clearly establishing terms and conditions, policies are constructed to allow for clear delineation of coverage between the various lines of business. For example, coverage may be excluded in one form because it is provided elsewhere.
Insurance should never be viewed as a substitute for loss control or the sole means of risk management, but as a critical element. Your insurance agent is there to help you interpret the legal contract that is your insurance policy.
Protect yourself by making sure you understand that contract and how it applies to your business.
Steve Blankenship, manager, underwriting practices group at Westfield Insurance, can be reached at (330) 887-8417 or [email protected]. In business for more than 156 years, Westfield Insurance provides commercial and personal insurance services to customers in 17 states. Represented by leading independent insurance agencies, the product it offers is peace of mind. For more information, visit www.westfieldinsurance.com.
