How do I Read my Policy Wording?

“Do you have any tips that can help me read my policy wording and understanding it better?”  is another question I received. Remember you can send me your short term related questions and I will try to answer them.

A Legal Contract

Contract

Insurance is a Contract with Terms and Conditions for Both Parties

A few things to keep in mind. Your short term insurance policy is a contract between yourself and the insurer. Like all contracts, both parties have commitments and responsibilities.  The insurance contract starts with a proposal form. You propose to the insurer that he should insure you by disclosing all the relevant facts and circumstances. The insurer replies with a quote and if you accept the quote, the policy contract consists of your proposal, the quote, the policy schedule and the policy wording. The proposal, quote and schedule are a record of what is insured and what not. It stipulates any special conditions or exclusions and the sums insured.

The policy wording sets out the terms and conditions.

Sections

The policy wording has Sections.

The first section is always the General Section that applies to all the other sections. In this sections you will find the general terms and conditions. It starts off by stating what the basis of the policy is – proposal, schedule and wording. Requirements regarding premium payment, the term of insurance, duty of care, cancellation or changes and how to claim.

You will also find the rules about claiming under this section.

General Exclusions

Exclusions

Exclusions – What is Never Covered

The next section is General Exclusions. It is standard and generally applicable. General exclusions are there to protect the industry, as the loss can be so big that it could bankrupt the industry.  Remember, insurance is the risk of one spread over the shoulders of many. General exclusions, as it were, protects the one against the risk of many.

Riots and war, nuclear substances, nationalization, liability by agreement and consequential loss are some of the things generally excluded.

Loss because of computer crime or viruses and asbestos contamination are also excluded.  In new policy wording you can expect to see pandemics excluded as well.

After the General Section, each section is a policy on its own, so to speak. What it means, is that each section sets out terms and conditions to cover a specific asset.

So you find Homeowners (Building) and Home Contents, All Risk, Motor and Public Liability, to name the most common sections.

The first paragraph of each section will tell you what is covered, like this:

Content

“In this section, insured property is property that belongs to you or for which you are responsible as shown on the Schedule.
It includes:
household contents;
personal property (including office and home-industry equipment belonging to you in your private capacity);
fixtures and fittings that belong to you as the tenant, not the owner, of the private residence.”

Buildings

“Your property insured is the private residential structures of your home. The Schedule gives its risk address and wall and roof construction. It includes all fixtures and fittings that belong to you as the owner or that you are responsible for as the owner. It does not include any fixtures and fittings that belong to a tenant or for which a tenant is responsible.”

Then will follow a paragraph explaining what risks are covered (see below Perils vs All Risk)

This will be followed by any additional or extended covers you may have or more (optional) covers you can select and pay a premium for.

There will be terms and conditions, explanation of what is not covered and definitions.

When I read policy wordings, I keep reminding myself what section i am reading. Like all legal documents, it is important to follow the numbering and I have a habit of circling the “and” and “or” as far as I go.

Perils Based vs All Risk

Perils Based Policy

Flooding is usually an insured peril

Most Content and Building insurance are Perils Based.  That means that there is a list of perils against which you are insured. This list includes things such as Fire, Wind, Storm and Earthquake. Normally there are about nine perils listed. If something happens and you claim, the questions is:  is it one of the listed perils? If not, you do not have a claim. That is important to know. Too often people have expectations about what is covered and when a claim is repudiated, they are disappointed. Reading this section carefully can save a lot of trouble. If you need specific risks to be covered and it is not part of the defined perils, you may be able to find insurance that does offer that cover.

An All Risk policy covers everything, except risks specifically excluded. In this case, when you claim, the question is:  “Did we exclude this risk?” If the answer is “no,” the claim has to be paid. When you read an All Risk Policy, it is therefore very important to pay attention to the exclusions.

Example:
A rock rolls down the mountain and damages a building.

Scenario 1:  Perils Based Policy

The closest we get to this event, is this:

“impact with the private residence by animals, vehicles, aircraft or aerial devices or other objects falling from them, or falling trees, except when felled by someone”

Since that rolling rock is not in that definition, there is no valid claim.

Scenario 2:  All Risk Policy

Does the policy exclude stones and rocks rolling down the mountain? If not, it is a valid claim.

It goes without saying that the All  Risk Section of the policy is an All Risk Policy! The Motor Section is also All Risk Based.

My experience is that insurers who offer All Risk Policies for Content and Buildings have stricter underwriting criteria and higher barriers to entry. It may be my imagination, but it also seems as if I have to submit more paperwork for claims.

Although an All Risk Policy may cover more events than a Perils Based Policy, the end results in terms of what is covered are not all that much different.

Policy wordings were simplified over the years and it is easier to read than a decade or two ago. Just remember that policy wording differs (sometimes substantially) from insurer to insurer.  Get hold of your policy wording and read it. Once you have read your policy wording, you will find it is not so difficult to understand.

If you have a question, just shout. And please leave a comment (or question) in the comment section below.

 

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