Let’s just say outright: Insurance forms and endorsements are hard to understand.

Insurance policies are hard to understand primarily because they are legal documents written and interpreted by “legal-minded” people. Although we use an innocuous-sounding name—a “policy”—these are legal contracts subject to contract law and precedent.

Additionally, “standard” policies, like those promulgated by Insurance Services Office (ISO) and the American Association of Insurance Services (AAIS), have been written, modified and rewritten over decades. Cobbling together old and new form language can, at times, create confusion.

A good example is the commercial general liability policy’s pollution exclusion (f.). Review the historical development of the exclusion compared to the current wording and it is easy to see where new language was added without addressing the layout of prior or existing wording.

Basically, the use of conjunctions and punctuation has not kept pace with the addition of exclusionary and exception language. The result is a patchwork that can lead to confusion, especially if the person reading and interpreting the exclusion is a stickler for grammar and punctuation.

Regardless of how intimidating the insurance contract might look, the application of certain rules can help ease the process of understanding the policy. When I worked on the consulting side of the business, I read hundreds of “standard,” proprietary and just plain strange forms cover to cover. To avoid living in a constant state of confusion, I developed a few guidelines. 

Remember, these guidelines are not shortcuts to reading the policy; there really are no shortcuts to reading any legal document. But they can be useful pointers toward correct policy interpretation. Whether you’re reading an entire policy or only sections, apply these 11 rules to make finding the most correct answer to a coverage question easier and quicker.

1) Ascertain who qualifies as an insured. If the person or entity suffering or causing the loss, injury or damage is not an insured, there is no need to go any further—there is no coverage. Regardless of how well the rest of the policy is designed, if insured status is not extended to the correct party or parties, the policy is not triggered. 

For example, the CGL policy contains four levels of insureds: 1) named insured(s); 2) extended insureds, who enjoy the same amount of protection as the named insured; 3) automatic insureds; and 4) additional—by endorsement—insureds. If the incorrect name or entity type is used, coverage may be lacking.

Not every policy has four levels. Some policies have three levels, some have two and a few—like the workers compensation policy—have only one (the named insured). When reading the policy, delineate the levels of insureds and the breadth of coverage extended to each.

Of all the rules, this is the most important. This must be right. Get this wrong and all the other work is useless. 

2) Confirm all forms and endorsements are included. Compare the forms and endorsements listed on the declarations page with the forms and endorsements actually attached to the policy. This includes confirming that the edition dates match, because the breadth of coverage can change between edition dates.

Next, confirm that all forms and endorsements requested are attached to the policy. If a specific endorsement was requested and included in the quote, make sure it is attached when the policy arrives. If it is missing, don’t just “note the system” that the desired endorsement is not there. Request it be added. The coverage provided should match expectations.

3) Annotate the policy form. This is a must. Highlight any form language modified by an attached endorsement and list which endorsements change that section. When reading and trying to interpret a specific section of the policy, apply the endorsement wording directly.

4) Read the insuring agreement first. This is the broadest coverage is ever going to be, so start here. If the loss is not contemplated within the insuring agreement, there is no reason to go any further.

Insuring agreements appear in every policy type, and each one places specific parameters on coverage. Basically, the insuring agreement is the box that holds everything in the policy together. If the loss is outside that box, stop.

5) Read the exclusions. After reading the insuring agreement, proceed to the exclusions. In most liability and special form (“all risk”) property policies, coverage is created when not excluded—for example, Coverage A in the CGL policy and the liability section of the business and personal auto policies. 

Treat “named peril” policies differently. Read the list of covered perils first, then the exclusions. Examples include Coverage B in the CGL policy and most other liability policies that cover a defined loss, such as a “wrongful act.”

6) Read the exceptions to the exclusions. Exceptions give coverage back in specific amounts. Insurance policies often “taketh away” and then give back through exception.

This can be frustrating, but there is a method to this madness. By taking away then giving back, the insurance carrier can control the amount of coverage it grants. Imagine how much more verbose a policy would be if the carrier tried to list everything that was covered and not covered. It makes more sense to take everything away and then give back the desired coverage.

7) When the policy refers to another section, read that section immediately. This can point to other provisions affecting a specific coverage or condition. Insurance policies are not written in “thought order.” Yes, insurance contracts are organized, to some extent, but because so much information must be conveyed, there are times when sections that relate to each other live in a natural flow of thought.

Full understanding of a specific coverage provision is possible only when you read referred sections immediately. If you try to read an insurance policy like a book without skipping to relevant parts, you will be confused for most of the story.

8) Pay attention to conjunctions in a list. “And” is inclusive; “or” is exclusive. In a list of several qualifiers, the use of “and” means all qualifications must be satisfied. “Or” means that if any of the qualifications apply, coverage is granted or excluded (or whatever the list is intended to provide).

Other important conjunctions include “but,” “nor,” “for” and “yet.” These are key directors.

9) Pay attention to key words and phrases. Certain key words must be highlighted when reading the policy. These words and phrases create, delete or alter coverage and limits. Note that this is not an all-inclusive list:

• Terms that limit terms, conditions or coverage, such as “not” as in “does not apply to” or “does not include.”
• Quantifying terms, such as “greater than,” “lesser than,” “greater of,” “lesser of,” “no more than,” “the most” or “all.”
• Terms that change the conditions, such as “unless,” “except,” “only if” or “subject to.”
• The most dangerous term in a policy is “however.” This is a qualifying term that creates some parameter around a coverage or condition. When you encounter “however,” discount everything before it.
• “Includes,” as the name suggests, is an inclusive term that broadens the provision to which it applies.
• “Must” and “regardless” mean there is no alternative. Surrounding circumstances are of no consideration in meeting the requirement.
• Sequencing terms, such as “first.” Some policy provisions list the order of events or actions. Pay particular attention to the order of events prescribed by these sequencing terms.

10) Read and understand the definitions of specifically defined terms. When the insurance carrier desires to control the meaning of certain words and phrases, it does so by specifically defining them in the policy. Such definitions can limit or explain the breadth of protection. Words not defined receive common, everyday meaning.

11) Understand and make sure all the policy conditions have been met. Insurance policies are known as conditional contracts. Failure to meet the policy’s conditions can result in the denial of coverage.

Two types of conditions appear in an insurance policy: 1) conditions precedent and 2) conditions subsequent. The central point of these conditions is the loss or claim. Certain actions must occur before the loss, and certain actions must be undertaken after the loss.

Practice these guidelines until they become second nature. Amazingly, these rules can apply to almost any contract encountered, so following them is beneficial beyond your professional life.

Chris Boggs is executive director of the Big “I” Virtual University (VU) and an IA contributor.

Want more on this topic? Head to the VU to register for a webinar available on multiple dates: 9 Rules for Reading an Insurance Policy Based on the Law of Insurance Contracts.