How to read a business insurance policy

Read it in this order: the declarations page, the insuring agreement, the definitions, the exclusions, the conditions and then the endorsements. The declarations page gives you the facts of your policy, and everything after it tells you what those facts mean, so a loss is covered only when it fits the insuring agreement, survives the exclusions and any endorsements that change them, and you’ve done what the conditions ask.

That sounds like a lot of reading. It’s less than it looks, though, because most of what a small-business owner needs sits in the declarations page, a handful of definitions, the exclusions and the endorsements, and the rest is machinery you can skim until the day you have a claim.

The six parts of a policy

That’s the method in miniature: the promise looked good until a later section changed it. The Kentucky Department of Insurance, whose consumer guide this anatomy follows, describes four basic parts of an insurance contract, which are the declarations page, the insuring agreement, the exclusions and the conditions, though it adds that most policies also have a definitions section and that endorsements can add to, delete or modify the original contract. That makes six parts.

Start with the declarations page

The declarations page is usually the first page of the policy. It identifies who is insured, what risks or property are covered, the limits and the policy period, and it’s also the page your certificate of insuranceCertificate of insuranceA certificate of insurance (COI) is a one-page summary that proves your business has insurance, listing your policies, limits, insurers and policy dates.Read the definition summarizes, so review it the day it arrives, line by line:

• The named insuredNamed insuredThe named insured is the person or business listed on the declarations page as the policyholder, with the main rights and duties under the policy.Read the definition. It should be your business’s exact legal name, plus any “doing business as” name. An LLC policy issued in the owner’s personal name is a mismatch worth fixing now.
• Locations and operations. The addresses and the description of your business should match what you do today. A café that now caters, or a contractor who added roofing, should check that the description covers that work.
• The policy periodPolicy periodThe policy period is the span of time between a policy’s start and end dates, usually 12 months, during which its coverage is in force.Read the definition. Coverage generally applies to events or claims within these dates.
• Limits and deductibles for each coverage. For liability, look for the per-occurrencePer-occurrence limitA per-occurrence limit is the most a liability policy will pay for all claims arising from a single incident, however many people are hurt or claims are filed.Read the definition and aggregate limitsAggregate limitAn aggregate limit is the most a policy will pay for all covered claims combined during one policy period, no matter how many claims you have.Read the definition and any sublimitsSublimitA sublimit is a smaller cap within a policy’s overall limit that applies to one specific type of loss or coverage, and it doesn’t add to the overall limit.Read the definition. For property, look for the limit and the deductibleDeductibleA deductible is the amount you pay toward a covered loss before your insurance pays, usually subtracted from the claim payment.Read the definition.
• Claims-made notices. If any coverage is claims-made, the declarations page should say so, and it’s usually where you’ll find the retroactive dateRetroactive dateA retroactive date is the earliest date of work or events a claims-made policy covers, so anything that happened before it isn’t covered, even if the claim is new.Read the definition as well.
• The forms and endorsements schedule. This list names every document in your policy. If your lease required an endorsement that isn’t on it, you don’t have it yet.

What the insurer promises

The insuring agreement is the core promise, the section that sums up what the insurer agrees to do and states what is covered. In a liability policy, it typically says the insurer will pay amounts you become legally obligated to pay because of covered injury or damage, and that it will defend you against covered suits. In a property policy, it instead typically says the insurer will pay for direct physical loss to covered property from a covered cause.

Property insuring agreements come in two basic forms. A named-perilsNamed perilsA named perils policy covers damage only from the causes of loss it specifically lists, such as fire or windstorm, so anything not on the list isn’t covered.Read the definition policy covers only the causes of loss it lists, so if fire and theft are on the list and a sprinkler leak isn’t, the leak isn’t covered, whereas an open-perilsOpen perilsAn open perils policy covers direct physical loss from any cause unless the policy specifically excludes it, making it the broadest common form of property coverage.Read the definition policy, sometimes called all-risk, covers any cause of loss that isn’t specifically excluded. So the form decides where you start reading. On a named-perils form, you read the list of covered causes, but on an open-perils form, you go straight to the exclusions.

Definitions are the most underrated pages

Skip the definitions and you’ll misread the rest of the policy, yet most owners flip straight past them. Defined words usually appear in quotation marks or bold, and the definition controls even when it differs from the everyday meaning, which is how a word like “insured” or “your work” can mean something narrower or broader than you’d guess. For a small business, three groups matter most:

• Who is an insured. Liability policies usually define who counts besides the named insured, such as employees, members or officers acting for the business.
• The type of harm. Terms like “bodily injury,” “property damage” and personal and advertising injuryPersonal and advertising injuryPersonal and advertising injury is the part of general liability that can cover claims over offenses like libel, slander, false arrest, privacy violations and copying another’s advertising.Read the definition decide what kinds of claims the policy answers.
• Your work and your product. These matter for contractors and anyone who makes or sells something, because several exclusions turn on them.

How exclusions and endorsements change the answer

Here’s how exclusions work, and it’s the part of a policy most people read wrong: an exclusion removes coverage the insuring agreement would otherwise give. They come in three kinds, excluded causes of loss, excluded losses and excluded property, which is a handy way to read them: is this exclusion about what caused the damage, what kind of loss it is, or what was damaged?

But many exclusions don’t stop at the first sentence. Read on and you’ll often find an exception, a passage that begins with something like “this exclusion does not apply to,” and that exception can hand back a slice of the coverage the exclusion just took away. The contractual liability exclusion in a general liability policy is the classic case, since it typically removes liability you agreed to take on in a contract, then makes an exception for an insured contractInsured contractAn insured contract is a type of agreement, defined in general liability policies, under which liability you take on for someone else’s injury or damage claims can still be covered.Read the definition, which can restore coverage for some of the liability you accepted in a lease or service agreement. Stop reading at the comma and you’d think you had no coverage. Read to the end, though, and you might.

Endorsements then sit on top of all of it, and they control over the wording they change, so the same exclusion can be widened by one endorsement and narrowed by another. A landlord’s additional insuredAdditional insuredAn additional insured is a person or company, such as a landlord or client, added to your liability policy so it can protect them from claims tied to your work.Read the definition endorsement or a contractor’s waiver of subrogationWaiver of subrogationA waiver of subrogation is an agreement, usually added to your policy by endorsement, that stops your insurer from recovering claim payments from a specific client, landlord or contractor.Read the definition broadens what you have, though an endorsement that excludes a type of work, say roofing on a general contractor’s policy, cuts it back. When an endorsement and the main form seem to disagree, the endorsement is the latest word. Additional insured wording is a good example of why the schedule matters: many small-business general liability policies already carry a blanket additional insured endorsement that adds anyone you’ve agreed in a written contract to add, such as a landlord, though not every policy has one, so look for it on the forms list before you ask for a separate endorsement.

So the reliable way to check any exclusion is a three-step loop: read the exclusion to its last word, look for an exception, then search the endorsement schedule for any form that mentions the same coverage part. It takes ten minutes. It’s also the only way to know what your policy says about the loss in front of you, and it’s the same reasoning that explains why a salon carries professional liability alongside general liability, since general liability policies often exclude professional services. The NAIC’s small-business guide notes that general liability doesn’t cover employee claims, vehicle claims or professional errors, and what business insurance doesn’t cover goes through the common exclusions and what fills each gap.

What do the conditions ask you to do?

Conditions are the rules that apply once you own the policy, above all after a loss. Kentucky’s regulator describes them as provisions that qualify or limit the insurer’s promise to pay, and it says plainly that if the conditions aren’t met, the insurer can deny the claim. Most of them are common sense, but in our view the notice condition is the one owners break most often, usually by waiting to see whether an incident turns into anything. The ones to know:

• Notice. Report incidents and claims as soon as practicable, and send lawsuit papers right away.
• Cooperation. Help with the investigation and defense, and don’t admit fault or settle on your own.
• Protecting property. After a property loss, take reasonable steps to prevent further damage.
• Proof of loss. Document what was lost and its value within the time the policy sets.
• Cancellation. How and when either side can cancel, and with how much notice.

After a loss you’ll meet these in roughly that order, which is the order our guide to filing a business insurance claim follows.

A five-question test for “am I covered?”

When something happens, work through these in order.

1. Is the person or business an insured? Check the declarations page and the definition of who is an insured.
2. Is it in the time window? For an occurrence policy, did it happen during the policy period? For a claims-made policy, was the claim reported during the period, for something after the retroactive date? See occurrence vs. claims-made.
3. Does the insuring agreement cover this kind of loss? Read it alongside the definitions.
4. Does an exclusion or endorsement change the answer? Read each relevant exclusion to the end, then check the endorsements that modify it.
5. Have you met the conditions? Report promptly and cooperate, and then the limits and deductible decide how much is paid.

If any step is unclear, ask before you need the answer. With Corgi, underwriters, not a broker, answer your questions about how your policy is written, and the best time to ask is the week the policy arrives, while nothing is riding on it.