Education
October 15, 2022

The Anatomy of an Insurance Policy

Education
October 15, 2022

The Anatomy of an Insurance Policy

Education
October 15, 2022

The Anatomy of an Insurance Policy

When your insurance policy comes in the mail, do you read it or just tuck it neatly into a file drawer? Most people don’t actually read their policy until they need to make a claim, which often is too late. Understand the basics of an insurance policy, so you can be sure your unique risks as a rental property owner are covered.

Insurance Terms to Know

It seems like a lot of jargon, but most insurance policies use some of the same basic terms. Learn these terms, and you are on your way to reading and understanding your insurance policy:

Liability

This is your legal obligation or responsibility for injuries or damages to another person. In your rental property business, you are liable for your tenants’ personal property if you cause the damage by not repairing a leaky roof, for example. As a property owner, your liability may extend to anyone injured on your property by a hazard you could have foreseen, like a broken sidewalk. Liability generally refers to losses to other people or their property, not your own losses.

Indemnity

Indemnity is what the insurance company pays to compensate you for a loss. The insurance industry refers to “making you whole again,” as the standard for indemnity. That means the money you receive is meant to return you and your property to the condition it was in before the loss took place. For example, after a fire, you could be compensated so that you can repair your property to its original standard, but you will not be compensated so that you could make the dwelling larger.

Premium

The premium is what you pay in exchange for insurance coverage. You may make monthly payments or pay an annual premium for different types of policies. The amount of your premium is set by the underwriters for your policy based on valuations, statistical analysis, and coverage terms and limits. The amount of your deductible may also affect your premium.

Rider

Also called an endorsement, a rider adds to the basic policy contract. For example, you might get a businessowners policy (BOP) and add a data cyber rider to protect your rental business from liability associated with a data breach. When you undertake a lengthy renovation project, you may need a vacant property rider to avoid coverage gaps.

Claimant

The individual or business that files a claim against an insurance policy is a claimant. You may file a claim as an individual or as your rental property business under your company name. If you are in an auto accident, for example, the driver of the other car may file a claim against your insurance policy. In that case, that driver would be referred to as a claimant.

Deductible

A deductible is the portion of the covered services you pay out of pocket before the insurance company pays the remainder of the claim. When you make a claim for storm damage to your roof, for example, the insurance adjuster may determine your loss is valued at $2,500. If the deductible on your policy is $2,000 then you are responsible for paying $2,000 and your insurer will pay $500.

Breaking Down Your Insurance Policy by Parts

One thing that might deter you from reading your insurance policy is its length. When it arrives in the mail in that big envelope, your first thought might be that you just don’t have the time to read all of it. But when you understand the standard parts of the policy, it is not necessary to read the whole thing. You can easily skim for the important information.

Declarations Page

The declarations page may be the most informative part of your insurance policy. It consists of a summary of the important points of your insurance coverage including the name of the insured, a description of the property being covered, the amount of coverage, and the policy terms.

When you get a new policy, you should always check the declarations page for errors. Be sure everything is spelled right and that the coverage dates are correct. These types of errors may seem simple, but if you need to make a claim on the policy, they could cause you some trouble.

If you choose to refinance your property, the declarations page may be used as lender-required proof of insurance. This is another instance in which the details are important. The property address and named insured must be correct to satisfy your lender.

Insuring Agreement

This part of your insurance policy sets up the contract for coverage between you and the insurance company, transferring the risk of significant loss from you (the insured) to the insurer. It describes the coverage promised by the insurance company in exchange for your payment of premiums. Depending on the type of insurance, the insuring agreement might include the payment of losses for a covered event, defense in liability lawsuits, and certain services the insurance company may provide to the named insured.

Your insuring agreement is likely one of two types: named perils or broad. In a named perils agreement, coverage is extended only in the event of certain incidents, and those perils are listed in the agreement. An all-risk agreement promises coverage for any losses except those specifically excluded in the policy.

Exclusions

Exclusions to your coverage are either noted in the insuring agreement or called out in a separate section of the insurance policy. Property insurance, for example, typically excludes damage due to flood, earthquake, or nuclear radiation. Business Personal Property can be added to coverage if needed but excludes property coverage for residence.

Endorsements

Following the exclusions will be an explanation of any riders or endorsements you’ve added to the basic policy. This is where you can fill in the gaps in coverage left by standard policy exclusions. For example, you may add a flood insurance rider to your property coverage if your property is located in a flood zone. You may also want to add a data response and cyber liability rider to your BOP.

Conditions

The conditions section of your insurance policy describes the obligations that both you and the insurance company have to fulfill the contract. Conditions will include cancelation provisions as well as the insurance company’s right to pursue a third party to recover losses if applicable.

The conditions you should pay closest attention to are the ones that require your actions regarding a claim. Most property insurance coverage, for example, will require you to file a claim within a certain time period following a loss. Your insurance policy may also spell out your obligation to protect your property after an incident, like tarping the roof after it is damaged in a storm to prevent further damage. The insurance policy may also require you to cooperate with an insurance investigation and with your own defense in a liability lawsuit. You could breach the insurance contract by not meeting these conditions and that might leave you without the coverage you were counting on.

Millers Mutual Can Help

If you have questions about your insurance policy, Millers Mutual can help. We focus exclusively on providing the right insurance coverage for your rental business. Contact Millers Mutual to find a trusted agent to answer all your insurance questions.

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