Small to midsize businesses often do not have legal teams to advise them on the types of insurance coverage they need to protect their businesses. They rely upon the broker to assess their needs without fully understanding what an insurance policy is. Below are some insurance coverage basics for both the novice and a refresher course for the experienced.
What is an Insurance Policy
An insurance policy is a contract between an insured (person/company seeking the insurance policy) and the insurer (the company offering the coverage) whereby the parties shift the risk. In exchange for premiums paid, the insurance company will defend and/or indemnify the insured against their insurable risks. Described as a legalized gamble, the insured is betting it will pay less or equal to the premiums for any loss it may experience, and the insurer is betting that their costs from the covered losses will be less than the premiums paid.
Insurance Policy Terms
Below is a list of key terms that businesses will encounter in their policy.
- Insurer – the company which issues the insurance policy.
- Insured – the individual or business customer who buys policy from the insurer.
- Declarations Page – the page(s) of the policy that set forth the types of policies purchased and coverage limits.
- Premiums – the amount the insured pays for the insurance policy.
- Deductible – the amount the insured pays in addition to the premiums based on specific claims made.
- Additional Insured – an insured that is covered under the policy (by virtue of contract, policy language or state law) that is not responsible to pay the premiums in order to receive the benefit.
- Insurable Interest – a loss capable of being insured.
- Loss – potential claim.
- Date of Loss – the date that the potential claim accrues.
- Claim – a formal request from an insured to the insurer within the terms set forth by the insurance policy.
- Claims Made Policy – coverage based on the date the claims were made.
- Occurrence Made Policy – coverage based on when the loss occurred.
- Occurrence – an event outside the insured’s direct control.
- Exclusions – events that fall within the policy, but are carved out from coverage.
Typical Types of Policies that Businesses Generally Consider
Most companies consider the following types of insurance policies to protect against loss. Below is not exhaustive, and the insurance industry continues to evolve to provide insurance products that meet their business customers’ needs.
General Commercial Liability – This is oftentimes referred to as the CGL property. The most popular and inclusive of the policies, the CGL protects your business from financial loss arising from property damage or personal and advertising injury caused by your services, business operations, or your employees
Errors and Omissions – E&O insurance is liability protection from claims if a client sues for negligent acts, errors or omissions committed during business activities that result in a financial loss. It is sometimes referred to as professional liability insurance because it is a type of professional liability insurance that protects companies, their workers, and other professionals against claims of inadequate work or negligent actions.
Employment Practices Liability Insurance – This is commonly referred to as EPLI or EPL insurance. It provides coverage to employers against claims made by employees alleging discrimination (based on sex, race, age, disability, gender identity, sexual preference, pregnancy, criminal status, military status etc.), wrongful termination, harassment, and failure to hire or promote and overall discriminating working conditions.
Commercial Property Insurance – This type of policy protects the physical structure of the insured’s commercial property from damage, as well as the property stored within. This may be combined within a CGL policy.
Auto Insurance Or Commercial Auto – This protects your business from employee accidents or damages arising from the operation of vehicles on behalf of the company, or damages arising from the use of company vehicles.
Event Liability – This is similar to the CGL, but it provides insurance based on events that may occur at a different venue, and have a limited place and duration.
Product Liability – This is insurance that is directly related to the product that is marketed, manufactured and sold by the company. It is oftentimes purchased to avoid an exclusion under the CLG policy.
Intellectual Property Liability – This insurance protects against the theft of intellectual property. This is insurance that is directly related to the product that is marketed, manufactured and sold by the company.
Cyber Loss Liability – Cyber liability insurance helps you to not lose your business in the event of a security breach.
The Parts of the Policy
The policies are generally broken down into the following four parts: (1) declarations page, (2) coverages, (3) exclusions, and (4) conditions.
Declarations. The Declarations section identifies who is the insured, what risks or property are covered, the policy limits and deductibles, and the policy period.
Coverages. The Coverages portion of the insurance policy includes a summary of what is covered. In the Insuring Agreement, the insurer agrees to do certain things such as paying losses for covered perils, providing certain services, and for some, agreeing to defend the insured in a liability lawsuit. Most policies purchased by a company are named perils’ coverage, under which only those perils specifically listed in the policy are covered. If the peril is not listed, it is not covered.
Exclusions. The Exclusions portion of the policy is the opposite. Exclusions take coverage away from the Insuring Agreement. The major types of exclusions that are excluded are perils/causes of loss, excluded losses and excluded property.
Conditions. The Conditions, or “rules,” are provisions inserted into a policy that place limitations on the insurer’s promise to pay or perform. If the policy conditions are not met, the insurer can deny the claim. Common conditions in a policy include the requirement to timely file the claim, or proof of loss with the company, to protect property after a loss, and to cooperate during the company’s investigation or defense of a liability lawsuit.
There are two other primary parts as well that most insurance policies have:
Definitions. Most policies have a “Definitions” section, which defines specific terms used in the policy. It may be a stand-alone section or part of another section. These are often the “bolded” terms throughout the policy.
Endorsements and Riders. Most business policies have Endorsements and Riders. Endorsements and Riders are written provisions that add to, delete, or modify the provisions in the original insurance contract. These may change the language of the policy itself. In most states, the insurer is required to send you a copy of the changes to your policy.
Which Laws Govern
Every state has its own insurance laws and its own accepted insurance policy forms. The laws of the states where the insureds’ risks are located generally apply, although there are exceptions.
We have provided a basic overview of the common state insurance policies but, as always, it is important to consider the laws of the insured’s particular state when interpreting the terms and legality of the insurance.
If you have any questions regarding insurance coverage, please contact Kristin Tauras at McKenna Storer. Kristin concentrates a significant portion of her practice to providing legal services to small and midsize businesses.