Understanding the Property Insurance Policy

A property insurance policy is a contract that agrees to pay a specified amount of money if certain events happen that result in a financial loss to a piece of property, personal or real, or to a business. As with any contract, be sure to read the details carefully. Just as you would with business insurance quotes, ask your agent or carrier representative to explain any items and/or provisions that you don’t clearly understand.

Most insurance carriers today have improved their policy contract wording so that the content is not as difficult to understand, but don’t be lulled into thinking erroneously that you are completely covered for everything. The contract is prepared so that the insurance company’s liabilities are limited to exactly what is stated in the contract and not excluded specifically, and no more. However, all policy contracts are filed with and reviewed by the resident state’s insurance department, and carriers are precluded from changing approved policy wording and required limits without further review by the department. This regulatory arrangement can make contracts unwieldy and sometimes produces difficult-to-understand modifications and amendments, but it serves to protect the consumer from substandard policies and poor claims procedures.

Here are the typical sections included in a property insurance contract:

  • Declaration page (commonly referred to as the “dec page”): This section personalizes the policy, customizes it for the owner and property, and is usually the cover page for the entire policy. This page will state (declare) the name of the insured policy owner, his or her address, the policy number, the address of the property or business, the type of policy, the policy dollar limit amounts per coverage section, and deductibles for each coverage. The dec page always states the time frame (stated by inclusive dates) for the policy, which is usually for one year. Some policies can be written for shorter periods (i.e., monthly) or for longer periods (typically no more than 18 or 24 months). Shorter periods are often written for auto liability policies. Longer periods are sometimes written for newly acquired businesses bought toward the end of the calendar or fiscal year, when it is more convenient and economical for both the carrier and business owner to purchase a policy for an entire year plus a few months. The names, addresses, and phone numbers (and more frequently, with newly written contracts, website and e-mail addresses) of both the carrier and agent, if used, will also be listed on the declaration page.

    Understanding the Property Insurance Policy

  • Privacy notice and consumer notices: Most financial transactions include a section stating the company’s privacy policies and how the policy owner’s personal information will be handled. Also, since most states have insurance regulations concerning consumers’ rights along with credit and fraud protection, these details and notices will be outlined in this section.
  • Definitions: All property insurance contracts include a listing of definitions of terms used in the contract. Some defined terms, such as “deductible” and “insured,” should be the same for all property insurance contracts, but be careful with certain terms that may differ from policy to policy and from carrier to carrier. Terms such as “repair” or “replace” can mean significantly different things, depending on the policy. A “replacement value” contract will pay to replace an item with a like item, regardless of the age or depreciation of the item. A “cost value” policy will pay only the adjusted cost, or actual worth, of an item, which may be significantly less than what you would pay to obtain another item to use in the same way.
  • Coverages: This section of the property insurance contract defines and details the insurance coverages of the policy, describing the type of replacement and repair and outlining the liability provisions. It also lists the risks, conditions, or perils that will trigger a valid claim. If the policy is a general or regulated policy, this section may outline any modifications, enhancements, or additional coverages that either the carrier has included to enhance the policy, or that the purchaser has requested in order to increase the coverage and/or limits of the primary, or base, policy.
  • Dollar amount or percentage limits: Most property insurance policies pay different dollar amounts for different damages or perils and may also list different dollar amounts per coverage. This section outlines, either by dollar amount or percentage, the specifics of each limit of reimbursement or repair amount to be paid by the policy. For example, some homeowners’ policies state reimbursement or payment of living expenses when the policy owner’s home is damaged and he or she must find other living arrangements until the home is repaired. Some policies state a dollar amount expense reimbursement limitation (i.e., up to $10,000). Other policies may specify reimbursement for rent and utilities but no other charges, and may state either a dollar amount limit or a time frame limit (i.e., reimbursement for up to 6 months). Other policies may state a reimbursement dollar amount limit as a percentage of the home’s value (i.e., up to 10% of the home’s value) that will be reimbursed per month, to be paid as living expenses while a home is unlivable.
  • Exclusions: This is one of the most important sections of the property insurance policy, and should be reviewed and clearly understood by the insurance purchaser. In this section, the carrier limits or restricts payment or reimbursement for certain perils, events, or conditions. Generally, policies can state that they will reimburse for “all perils” caused by fire, for example, except for any that may be listed in the exclusion section; this section may exclude fire damage caused by negligence on the part of the owner or give other limitations, as a dollar amount, a percentage, or a frequency of the peril. Certain events, perils, or conditions can be specifically excluded in this section, but may be covered with the purchase of a rider or endorsement to the primary policy. Earthquake and windstorm coverage is often excluded in property insurance policies but is frequently covered in the endorsement section, which overrides the exclusion listing.
  • Conditions and responsibilities: This part of the policy is called the “housekeeping rules” section. Here, the carrier outlines the duties and responsibilities of both the carrier and the policy owner in the event of damage to a covered property, including how to appeal a claim that is not paid to the owner’s satisfaction. A stated policy owner’s duty could be that the carrier requires a filed police report in the event of an auto accident involving another automobile. A stated carrier’s duty might be to respond within a certain amount of days to a reimbursement claim. This section outlines any dispute regulation guidelines that must be followed. It also lists details regarding payment of the premium, any grace periods, how to renew or cancel a claim, or how to contact the carrier for any policy servicing.
  • Riders, endorsements, or amendments: Riders and endorsements are usually purchased by the policy owner to increase limits or add coverages that are not available under the primary policy. Carriers can endorse or amend a policy either to comply with state laws or to enhance the policy for various reasons. Endorsements and amendments can accompany the newly written policy or can be added at a later date. Sometimes, but not often, a policyholder will request an endorsement that lowers the premium by specifically excluding a coverage included in the primary policy; or the rider may lower one or more of the dollar amount limits written in the base policy.
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