How to Easily Read Your Insurance Policies and Discover Coverage Gaps
Insurance policies are written by lawyers, so naturally, they are IMPOSSIBLE to read!!! Until now….. Once you understand the basic format of commercial and personal insurance policies, then you’ll be able to read your insurance policies like a pro.
Why should you care?
Well, if you know how to quickly and easily read your insurance policies, then you will be able to:
- Discover coverage gaps lurking in your policies and address them with risk management and/or different coverage
- Discover opportunities for cost savings – by gaining a better understanding of how your policies are written, you may also discover areas of duplicate coverage or insurance you don’t need, which can reduce your overall premiums
- Gain control of your business or families risks so you can better protect them and maximize premium savings
How to Read an Insurance Policy
Most insurance policies are written using a combination of the following segments:
- Declaration Pages
- Coverage Sections
- Insuring Agreement
Each section must be read in order to understand what’s covered. For example, if you are looking to determine whether your Homeowners or Commercial Property policy covers damage from mold, you’ll want to start by reading the definition of mold, then proceed to the insuring agreement, exclusions and endorsements. Finally, if you were going to file a claim, then double check the conditions pat to make sure you’re within the confines of the insurance policy terms for reporting and for guidance on how to handle it.
Start here. On property and casualty insurance policies, the declaration pages are simply an overview of what’s covered. Typically, this will include policy limits, deductibles, named insureds and policy period dates.
Insurance policies may sometimes be broken up into several sections of coverage descriptions or type. Within each coverage section, there may be a unique insuring agreement and set of exclusion and definitions, but not always.
This section of the insurance policy simply states, in clear legal terms, what is covered by this particular section of the policy or by the entire policy – you will know whether it’s for entire policy or particular section as you read it, depending on whether there are multiple coverage sections or not.
Any conditions set forth by the insurer in terms of your rights and duties during claims and throughout the policy period are described in the Condition section of the policy.
An often overlooked area by novice policy readers, the definition section is pretty much your key to understanding the rest of the insurance policy.
In the Exclusions part of the insurance policy, coverage that is specifically removed or not intended will be clearly described.
Once you have read the preceding sections, you’ll need to read all the endorsements to determine what’s been added, altered or removed from the policy. Endorsements are simply changes to the insurance policy, so they should be read in the context of coming after the other sections and replacing or adding to anything else in the document.
**Below are images showing examples of each part of the insurance policy, using the standard Commercial General Liability policy as reference.
Other Insuring Agreements within same policy
Coverage Section - Who Is An Insured (example of multiple coverage sections within a policy)
Now that you know how to read your insurance policies, let’s focus on “why”. The reason to read your insurance policies is simple: to Discover Coverage Gaps and Cost Savings.
Below is the formula we use to discover coverage gaps, as described in the Ultimate Guide to Buying the Right Comprehensive Business Insurance. Further down the article, we will review cost savings opportunities.
- Write down your top biggest exposures (or threats) for the main four risk categories of any business: Property, Liabilities, Key Employee and Net Income
- Follow the formula for reading your insurance policies (read Insuring Agreement and Exclusions, followed by Endorsements and Definitions) and determine if they cover those exposures listed in step 1
- Talk to Shields Insurance about the problems you discover and we can also assist in evaluating and fixing them
Here are a few of the most common coverage gaps you may discover:
- Low Coverage Limits – Often, businesses have policy limits that are too low, especially for property insurance.
- Missing Names – Many businesses have multiple entities setup and it’s important to have every name with an insurable interest listed on the policy.
- Incorrect Classification or Rating Basis – Businesses evolve over time and it’s important to rate the liability and work comp policies with accurate classifications. On property, the type of construction is a common error found on insurance policies.
- Warranties and Protective Safeguards – Policies often have warranties or protective safeguards which obligate you to certain conditions in order for claims to be paid. For example, if a policy warrants that your building contain working smoke detectors, then you are obligated to comply in order to maintain coverage.
- Missing Coverage – Once we know your biggest exposures, there can be a myriad of missing coverage due to exclusions or definition carve-outs. Here are just a small sample of examples:
- Punitive Damages – Commonly excluded, but it’s insurable in many states and can cost you a small fortune if not insured.
- Contractual Liability – Liability policies contain exclusions for contractual liability, but most businesses do have exposure to this risk. It’s important to understand the nature of this exclusion as well as when and how coverage is given back.
- Pollution – Losses from pollution are frequently excluded or limited within liability and property insurance policies.
For more examples, check out 10 Spooky Exclusions Lurking in Your Business Insurance Policies.
Cost savings is everyone’s favorite part! This is the fun part, where you find ways to put money back in your pocket.
Here are the main strategies to implement for cost savings (for your personal insurance, we wrote an article on 4 Easy Ways to Save Home & Auto Insurance Costs without Sacrificing Coverage):
- Review for Rating Accuracy – Each policy will contain a rating basis. Check the basis and ensure it’s accurate. If it’s wrong or if the classification (in the case of General Liability or Work Comp) is wrong, there could be opportunities for savings. CAUTION: This exercise could also result in higher costs, but it’s important to be honest with your insurer if you want claims to be paid! The important thing is to be creative and shrewd in when evaluating classification options. Be honest, but realize that you and the insurance company have different interests when selecting classification bases.
- Review for Duplicate or Unnecessary Coverage – When reading the policies, if you see coverage that is duplicated in more than one policy, that may be an opportunity to carve out the coverage from one policy and save money. Also, if you find coverage that just isn’t of much value to you, then ask about getting it removed for a rate credit.
- Increase Deductibles (and/or lower Limits) – If you are comfortable with lower limits or higher deductibles, that is easy way to reduce costs.
- Risk Management – Most businesses are constantly seeking new ways to mitigate or transfer risks. It’s important to discuss any strategies you may implement or already implement because this can help improve insurance rates in many circumstances. Also, it will keep your rates low over the long haul because it will keep your claims experience low.