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HOW TO READ AN INSURANCE CONTRACT?

RULES FOR READING AN INSURANCE CONTRACT

An insurance policy is a very unique contract in the sense that when the contract is fully performed it is considered a “loss”.  The concept of “loss” has evolved as a term of art created by the insurance companies.  Here are a few simple Rules when reviewing your insurance contract:

  1. Copy the contract so that you can make notes and mark it up;
  2. Confirm with the insurance company that the policy is complete; that is, the contract includes all endorsements;
  3. Read the Declarations Page, which gives a summary of the contract including the key terms and provisions such as the specifically named insured, address, policy period, location of premises, policy limits, and other key information that may vary among insurance contracts;
  4. All the forms and endorsements included with the contract should be compared to the information on the Declarations Page so there is no misunderstandings;
  5. It should be specifically determined who in facts qualifies as an “insured,” because in some situations individuals not identified may also qualified as an insured, such as an employee of the insured corporation, etc.;
  6. The limits of coverage should be clearly determined whether it is “burning,” which means that the amount will be reduced by the costs of defending the policyholder from claims;
  7. The insuring agreement (“grant of coverage”), which is the provision in the contract that indicates what is actually being covered by the insurance, must be read carefully;
  8. Exclusions and exceptions to exclusions must be fully understood (Exclusions will also be in Endorsements; an Endorsement is an additional provision that makes a change to the insurance contract);
  9. Referenced sections must immediately be understood (if there are gaps in the insurance contract and referenced terms without additional information, clarification from the insurance company must be sought);
  10. Understand the defined terms fully; and
  11. Key words and phrases must be carefully read and its effect must be fully understood.

WHAT IS A BURNING POLICY?

A Burning Policy is an insurance policy that provides limits of coverage but also includes the amount of money spent on defending the policyholder.  Therefore, when a policy limit demand is made, the actual amount available to recover is reduced by the amount spent on defense attorney fees to date.  The policy limit demand must indicate that whatever is available is being sought as recovery and acknowledges that the amount may be reduced by any amounts spent on defense costs thus far.  Failure to provide this language may be an obstacle in pursuing an insurance bad faith claim in the future, and accordingly may also be considered legal malpractice by the plaintiff’s counsel. Furthermore, the plaintiff’s attorney should ask the policyholder during a deposition if they are “aware” that a policy limit demand was made on the claim.  The attorney defending the deposition may object based on attorney-client privilege, but the information is not in fact protected because the question is not asking what was discussed with the policyholder’s attorney.  Rather, the question merely asks whether the policyholder is “aware” that a policy limit demand was made.  This sets the groundwork for an insurance bad faith claim in the future.  In addition, the policyholder, even as a named defendant, is also able to assign their rights under the policy to the plaintiff.  Although, the policyholder will be bound to cooperate with the insurance company throughout the litigation process.

KEY WORDS AND PHRASES IN AN INSURANCE CONTRACT

Key Words and Phrases to be mindful of within the insurance contract include:

  • And (inclusive, conjunctive – which means that the policyholder must have all of the things indicated in the contract in order to have coverage
  • Or (exclusive, disjunctive – which means that the policyholder may have either of the things indicated in the contract)
  • However
  • Except
  • Unless
  • Only if
  • Subject to
  • Includes
  • Must
  • Regardless
  • First

HOW TO INTERPRET THE INSURANCE CONTRACT?

Certain rules of interpretation have been established by the Courts when considering an insurance contract.

For example, provisions that provide coverage (e.g. the insuring agreement, exceptions to exclusions) are interpreted broadly and in favor of providing coverage to the policyholder.  However, the policyholders bear the burden to establish that coverage applies.

Likewise, provisions that limit or restrict coverage (e.g., exclusions, definitions used to take away coverage) are interpreted narrowly and against the carrier.  The carriers bear the burden to establish that an exception or exclusion applies.  Exclusion must be conspicuous, plain, and clear.