Why Policy Language Matters
Why You Should Pay Attention to Policy Definitions
Policy language continues to change as technology evolves and insurance carriers take on risks that haven’t been underwritten yet, but aren't excluded.
With the recent soft market, we’ve seen a greater opportunity for carriers to consider exposures or manuscript endorsements they wouldn’t normally consider in a hard market. As a consumer, it’s important to understand what the policy states and what it means for your business. Additional forms (e.g. endorsements, enhancements and exclusions), sublimits and policy definitions are key considerations when interpreting coverage.
Historically, when a standard Insurance Services Office (ISO) policy (e.g. General Liability and Workers’ Compensation) was in play, it was anticipated with a fair degree of certainty, and the policy would respond the same regardless of the carrier. More and more, we’re experiencing carriers adding company-specific “enhancements” or endorsements/exclusions to the policy that alter the coverage available. Some of these “enhancements” can clarify a gray area of a policy, and while it appears additional coverage is being offered, it’s usually placing a sublimit on the coverage or clarifying the intention of coverage.
In placing a sublimit on coverage, the carrier can essentially be clarifying the insurance from reducing or limiting coverage, that upon wrongful employment practice interpretation, may have required the carrier to defend their insured. Doesn’t matter right? Coverage is coverage? WRONG.
When a sublimit is placed on a policy, the policy limits are no longer in play and the loss is subject to that sublimit. Sublimits are typically managed similarly to indemnification in that they typically provide a reimbursement to the insured. This reimbursement can be in the form of an amount toward damages only, a limit on the defense cost reimbursement or a combination subject to the total limit.
Policy definitions are probably the least considered parts of the policy, however, one of the most critical. Policy definitions clarify “key” terms in the policy such as:
- What’s considered a “claim”
- What “damages” are defined as
- What constitutes a “wrongful” act
These terms in a policy solidify whether coverage is available. The less defined a term, typically the broader the interpretation of coverage can be. Less is more, at least for the most part. For example, if the definition of a “Wrongful Act” includes wrongful employment practice, a separate policy defining “Wrong Act” as discrimination, harassment, and retaliation will result in less covered scenarios than found in the broader definition.
When evaluating two quotes for the same line of coverage, it's important to understand what you’re comparing. Be aware of the enhancements and endorsements, sublimits and policy definitions. Your broker can assist in explaining the difference between these policies. There can be a number of reasons it makes sense for an organization to take less coverage, but knowing the risks is critical to determining what type of risks your company is comfortable taking.
Need help understanding your policy language? Contact the ‘A’ Team – we’re always here to help.
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