Jane Dotson
Insurance contracts can be confusing to navigate, with their specialist terminology and numerous clauses. However, it is important to understand the terms of your insurance policy to ensure you are adequately covered. Insurance clauses are typically easy to identify, as they are often found in their own section of an agreement with a heading that includes the word insurance. There are several types of insurance clauses, including other insurance clauses, exclusion clauses, and condition precedent clauses. Other insurance clauses are included in policies to avoid multiple insurers paying for the same loss, while exclusion clauses outline the limits of the risks that are insured by stating what will not be covered by the insurance contract. Condition precedent clauses, if broken, may allow an insurer to deny coverage.
| Characteristics | Values |
|---|---|
| Purpose | To outline the obligations and entitlements of the insuring and non-insuring parties, respectively |
| To specify the risks covered by the insurance | |
| To ensure appropriate coverage for the agreement | |
| To prevent gaps in coverage | |
| To determine the rights and responsibilities of insurance companies when multiple policies are triggered | |
| To prevent policyholders from receiving more than the value of the loss when multiple policies are triggered | |
| Types | Pro Rata Provisions |
| Excess Provisions | |
| Escape Provisions | |
| Exclusion Clauses | |
| Condition Precedent | |
| Notification Clause | |
| Title Insurance | |
| Additional Insured or Loss Payee |
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What You'll Learn
Other Insurance clauses
"Other insurance" clauses are provisions in insurance policies that apply when a policyholder has multiple policies that cover the same risks. They are designed to determine the rights and responsibilities of insurance companies in relation to each other and ensure that policyholders do not receive more than the value of their loss when multiple policies are triggered. These clauses can help policyholders protect themselves and manage their insurance programs by providing clarity on how coverage is coordinated among multiple insurance companies.
There are several types of "other insurance" clauses, including pro rata clauses, excess clauses, and escape clauses. Pro rata clauses specify that each insurance company will pay its proportionate share of the loss, contributing equal amounts until the loss is fully paid or their applicable limits are reached. Excess clauses state that a policy will only provide coverage for liability in excess of the amount provided by other valid policies, up to its limits. Escape clauses allow an insurer to avoid liability for losses covered by other valid policies.
When disputes arise due to overlapping coverage, courts interpret the contract language and applicable laws to determine insurers' obligations and resolve the dispute. Courts may declare conflicting "other insurance" clauses mutually repugnant, requiring insurers to share the loss on a pro rata basis. The interpretation of these provisions can vary across jurisdictions, so understanding the relevant laws is essential for policyholders and insurers alike.
"Other insurance" clauses can delay claim payments and impose unexpected deductibles for policyholders, leading to potential disputes. Policyholders should carefully review their policies and consider how overlapping coverage may impact their program. Structuring insurance programs thoughtfully and consulting with brokers can help anticipate and resolve potential issues related to "other insurance" provisions.
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Exclusion clauses
In addition to D&O insurance, exclusion clauses are also prevalent in home insurance policies. For example, damage caused by natural events such as earthquakes or floods is generally excluded from coverage unless a separate policy is purchased. Similarly, damage caused by aggressive dog breeds, infestations, or mould is typically excluded from standard home insurance policies. Exclusion clauses may also apply to business use, governmental actions, power failures, or neglect, where the homeowner is considered responsible for the damage.
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Condition precedent clauses
A condition precedent clause is a condition that must be satisfied before an insurer becomes liable for a claim. These clauses are important as they allow the insurer to decline claims. There are two types of condition precedent clauses:
- Conditions precedent to the validity of an insurance contract: These conditions must be met before the risk is transferred to the insurer. This includes payment of premiums, requirements to provide information, and the absence of overlapping insurance. If these conditions are not met, the insurance contract does not come into existence.
- Conditions precedent to the insurer's liability: These conditions must be satisfied before the insurer is liable for a claim. This includes claim notification requirements and the obligation to take reasonable precautions to minimise the risk of loss. For example, in the case of Aspen Insurance UK Ltd & ors. v Pectel Ltd [2008], the court held that a clause requiring notice of a claim was a condition precedent as it allowed for the investigation of the claim.
The Insurance Act 2015 introduced changes to condition precedent clauses. Section 11 of the Act, which came into force on 12 August 2016, applies to terms related to a particular type of loss, location, or time. It states that insurers cannot rely on non-compliance with these terms to exclude, limit, or discharge their liability if the policyholder can show that non-compliance did not increase the risk of the loss. This is a significant change from the previous law, which allowed insurers to deny claims entirely due to non-compliance with a condition precedent, regardless of whether it caused the loss.
It's important to note that a condition precedent clause need not be specifically labelled as such. The court will consider the entire clause in context to determine its meaning. If a term is not a warranty or a condition precedent, insurers cannot decline or reduce a claim for breach of the term unless the breach results in an actionable loss. However, if the term is a condition precedent to liability, non-compliance entitles the insurer to deny the claim unless it is a 'risk mitigation term'.
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Title insurance clauses
There are two main types of title insurance: lender's title insurance and owner's title insurance. Lender's title insurance, usually purchased by the borrower, protects the lender in case the seller cannot legally transfer ownership rights. On the other hand, owner's title insurance, often paid for by the seller, safeguards the buyer's equity in the property. It is worth noting that the cost of owner's title insurance can vary depending on factors such as location, insurance provider, and the purchase price of the home.
When purchasing a home, it is common to receive a deed that demonstrates the legal transfer of ownership from the seller to the buyer. Title insurance provides protection in cases where someone sues, claiming they have a right to the property from before the buyer's purchase. This type of insurance is particularly important for lenders, as it safeguards their financial investment in the property.
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Additional insured or loss payee clauses
An additional insured or loss payee clause is a provision in an insurance contract that provides coverage to a third party who is not the original insured. This third party can be an individual or a business entity with liability exposure due to their relationship with the insured.
An additional insured is typically a person or entity that shares liability coverage with the named insured. This means that they are protected from liability risks, such as lawsuits, that may arise from their relationship with the named insured. For example, if a visitor gets injured after tripping on a box left in a hallway, the janitorial company hired to clean the premises could be exposed to litigation. To protect itself, the janitorial company would ask the property owner to list it as an additional insured on the owner's general liability insurance. That way, if the injured visitor sues the janitorial services company for negligence, the building owner's insurance policy will defend the company. Adding an additional insured typically involves a charge since it expands coverage under the policy.
On the other hand, a loss payee is a third party with an insurable interest in the property covered by the policy. This means that they have a financial interest in the property and are entitled to receive payment for losses to the property. A loss payee typically comes first in receiving payments for covered losses, and the payment is made to the extent of their insurable interest. Adding a loss payee to a policy usually does not incur an additional cost since it does not provide extra coverage but simply redirects the existing coverage.
It is important to note that while both additional insureds and loss payees can receive benefits, they do not have the same authority as the named insured, who is the only one with the right to request changes or cancel the policy. Additionally, not all types of insurance policies allow for the addition of an additional insured or loss payee, so it is essential to consult with an insurance agent to review the options and determine if the request is reasonable.
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Frequently asked questions
An insurance clause is a provision in a contract that outlines the obligations, entitlements, and risks covered by the insurance policy. It dictates the responsibilities of the insuring party and the benefits available to the non-insuring party.
There are several types of insurance clauses, including:
- Exclusion Clause: This type of clause specifies what is not covered by the insurance contract, outlining the limits of the insured risks.
- Condition Precedent: This clause states that if a certain condition is not met, the insurer can deny coverage, regardless of the loss incurred.
- "Other Insurance" Clause: This addresses situations where multiple insurance policies are triggered for the same loss, determining each insurer's responsibility in covering the claim.
- Pro Rata Clause: This clause is a type of "other insurance" provision, where each insurer pays their proportionate share of the loss.
- Excess Clause: This clause states that the policy will only provide coverage in excess of other valid insurance policies, up to its limits.
- Escape Clause: This clause states that the insurer is not liable for losses covered by other valid insurance policies.
Insurance clauses outline the specific protections and limitations of an insurance policy. By understanding these clauses, individuals and businesses can ensure they have adequate coverage, know their obligations, and avoid potential gaps in protection. Additionally, in the event of a dispute, a clear understanding of insurance clauses can help resolve conflicts and ensure timely claim payments.
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