How to read an insurance policy: Part II

By Michael Kelly
Risk Management Director

In April's Managing Your Risk column we covered some of the basics necessary in understanding what is an insurance contract. This month I hope to provide a systematic process to help you as a risk manager be able to analyze your policy – at least at a cursory level when you are trying to discern the question of "do I have coverage?"

Of course, this question can arise before or after sustaining an actual loss, and each situation carries its own method to analyze a given scenario.

Pre-loss typically utilizes the analysis of a given situation derived from the insured's past lost history. This method is somewhat limiting in that in addition to what has already happened, it is difficult – if not impossible – for the risk manager to then think of every conceivable loss event that might occur in the future based on their past. "What has happened in the past is likely to occur in the future …" is a basic assumption employed by underwriters and is the main reason they always want your previous loss runs in order to provide you with a quote.

Post-loss analysis normally must start with the determination of whether a valid, enforceable contract actually exists between the insurance carrier and the insured. Once this is established then the process shifts to determine the extent of actual coverage that is being provided by the insurance policy in question.

This method of post-loss analysis often used is through utilization and understanding of an acronym – DICE* – that stands for four of the six major categories of policy provisions typically found in most insurance contracts: Declarations, Insuring Agreement, Conditions and Exclusions. Each section is examined in reference to the loss specifics in a type of decision tree or coverage determination matrix (see chart at right).

Given a particular type of occurrence, by essentially considering the particular facts surrounding the loss and utilizing this matrix, it becomes possible to ascertain if in fact there is or should be coverage.

The DICE method first begins with an examination of the Declarations page of the insurance contract. This is normally the first page that details items such as the named insured, the address, limits of applicable liability, and the effective dates the policy begins and expires. So for example, given a tornado wind loss that occurred on April 16, 2011, if the policy term listed in the declarations shows effective dates running from April 1, 2010, to April 1, 2011, then the loss occurred outside of the policy term and this negates coverage from being applicable. But if the loss occurred on March 30, 2011, it falls within the described policy term and there is nothing that precludes or negates coverage. As such, you proceed to the next category in the matrix, Insuring Agreement.

The Insuring Agreement section of the insurance policy contains language that gives the parameters as to what perils and/or circumstances are covered. This may be accomplished through the listing of individual perils insured such as fire, windstorm, hurricane, etc. Or, it may use broader language, stating something to the effect of: "This policy provides coverage against all perils causing direct physical loss to property except as hereafter excluded." If the risk manager finds the peril or policy language that would include the loss type in question, then they proceed further to the Conditions section of the policy. If the Insuring Agreement section does not include or address the peril in question, then in all likelihood it is not a covered loss.

The Conditions portion of the insurance policy lists any duties required of either the insured or the insurance company that apply before and after a loss occurs. Examples of conditions for the insured might be the requirement to report a loss as soon as is practicably possible, or allowing the carrier to inspect fire damage after a loss occurs but prior to beginning repairs. Another might be an agreement that the insured will attempt to protect the property from further loss or damage, thereby minimizing the total loss as it is possible.

Often the Conditions section of the policy will stipulate how to first address a situation whereby there is a discrepancy between the insured and the insurance company. It may stipulate an arbitration process that must first be followed before it becomes possible to legally sue the carrier. Further, the ability for the insurance carrier to subrogate or counter-sue another party, and/or salvage rights may be outlined here.

Having met any applicable conditions, you can move to the next section of the DICE matrix, Exclusions. There in fact may be an actual section of the insurance policy labeled Exclusions, but just as often there are exclusions that also appear anywhere in the policy.

When the loss circumstances being considered are described or listed as being excluded anywhere in the policy, then there likely is no coverage. This is typically the hardest policy language area to understand as it may negate or partially negate coverage previously listed and afforded in the Insuring Agreement section. Often open-ended language such as "the following exclusions apply unless specifically stated elsewhere in this contract" are utilized to illustrate exclusions or verbiage that alter policy language found in other sections of the insurance policy.

The final policy sections are Definitions and Miscellaneous Provisions. Although not part of the DICE matrix, they should also be analyzed as they may clarify language utilized in the other four main policy sections. Miscellaneous Provisions seldom affect coverage but often need to be considered in concert with Exclusions.

Having reached the conclusion that a given circumstance is in fact a covered loss, the final step is to determine how much is actually payable under the insurance policy. For property insurance the amount payable may be defined by the listed location limit, applicable deductibles, self-insured retentions and/or loss adjustment, valuation and payment provisions. Given a liability loss, the valuation process is defined and determined by actual damages sustained, a court of law, or more typically through negotiation between the parties involved.

My general recommendation given a questionable covered loss is to proceed in turning it in to the insurance carrier for consideration. If it is deemed an uncovered loss, request that the carrier show you specifically the policy section and provisions that precludes or negates coverage. While using the DICE decision matrix will not make you an expert in reading and understanding insurance policy language, it will go a long way toward making it an easier process.

* Foundations of Risk Management 2nd Edition AICPCU – Charles M. Nyce, Phd,CPCU,API

NCACC Risk Management Director Michael Kelly writes a regular column on risk management for CountyLines. With more than 32 years of risk management/insurance experience, he holds the Associate in Risk Management for Public Entities, Certified Risk Manager and Certified Insurance Counselor professional designations. He can be reached at michael.kelly@ncacc.org or (919) 719-1124. Archived versions of the column can be found online at www.ncacc.org/managingyourrisk.html.