Whoa! What is this huge envelope in the mail? Oh…it’s just my insurance policy. Well at least I have a new paper weight now!
Let’s discuss an efficient (and much shorter) way to make sense of and understand your insurance policy. All insurance policies are modular in order to permit Insurers to streamline their operations. Therefore, once you have a grasp on these components and how they fit together, everything becomes much clearer.

This insurance policy has too many pages! Am I supposed to read all of this…

Thankfully, NO. Let’s look at ways to decipher these insurance policies without necessarily reading the entire document word for word.
Unfortunately, the length of insurance policies isn’t the only barrier to comprehension. They are also complex legal contracts filled with double negatives and insurance jargon. Let’s explore some shortcuts so that you can absorb the 80% of information that matters most. You can then rely on your insurance broker to guide you through the 20% of specialist knowledge that remains and how it might apply to your specific situation.

What’s buried in my Policy?

The insurance policy is made up of multiple components that fit together. We can group these pieces into 2 main sections: The Declarations and the Policy Wording.
The Declarations are found at the beginning of your policy and shouldn’t be more than 2-5 pages long. These are the pages that include your personal information, the policy term and the types of coverage with their respective limits. For example, the Declarations pages of your auto policy might include the make & model of your vehicle, the VIN number, the driver and the premium.
Usually, we stop reading here…
The Policy Wording makes up the rest of the policy. In the industry, we often use this as a “catch-all” term that encompasses all the legalese that follows the Declarations pages. The policy wording section will contain many sub-sections including (but not limited to) the Insuring Agreement, Exclusions, Statutory Conditions, Definitions, Endorsements and any other forms thrown in for good measure!

What type of Policies exist?

There are two main families:

• “Named Perils” aka “Specified Perils”
• “All Risk” aka “Comprehensive”

Let’s throw away the insurance jargon for a second…
Basically, Named Perils means that you are only covered if a specific event happens to you (the insurance industry calls these events “Perils”). There is a list of these events or “Perils” buried within the policy wording section. Usually, it will include fire, smoke and a few others. Not much else.
All Risk works differently. Instead of covering a specified list of events, everything (ia. All scenarios) is/are covered unless there is an exclusion. Here we are again with insurance double negatives…So it IS covered unless it isn’t. Simple hun?
Which is better? It sounds crazy and counterintuitive but #2 is far superior to #1 in every situation. The idea is that I’d rather have all situations covered (save for a few exceptions) rather than have only 5 specific situations covered (and nothing else).

Which type do I have?

Before we begin, we need to determine the type of insurance policy we have. This is important and will guide us on how to read most of the policy.
To verify which type of policy you have, look for a section called “Insured Perils”. Try to see if the language incorporates the word “ALL”. For example, here is the language from an All Risk Home Policy in Canada (emphasis mine):

If you are lucky enough to have a PDF copy of your policy, you can figure this out quickly and easily by doing a Control F search of the word “all”.

Start from the end: The Exclusions

In most cases, you’ll be advised by your broker or agent to purchase an All Risk policy. Assuming this is the case, you’ll want to read your policy backwards. Start specifically with the exclusions and read through them carefully.
Most of the exclusions will make sense to you but at least some may come as a surprise. Others will sound like double negatives and need clarification. Note the confusing ones and ask your broker to guide you through them. Make sure you understand each of them. A quick conversation will be well worth it.

What’s covered

After having read the exclusions, you’ll have a better feel for what’s not covered. You’ll know that your home might be insured for most things (ie. All Risk) but that mold, even if costly, would not be covered. Now that you know what’s NOT covered, let’s make our way back to the front of the document where you’ll find the Declarations again.
Read through each of the coverage categories and pay special attention the names and amounts. Any amounts that look unusually large or small should be questioned. Make sure that the names of the coverages are clear. If anything looks like it’s the name of an insurers product or brand rather than the name of the coverage, ask your broker for clarification.
Also, some coverage categories get lumped together into catch-all coverages for multiple categories (example: the building + contents + other). This coverage category might have an undescriptive name that’s related to the Insurers specific insurance brand or product name.

Careful to look for Penalty Clauses!

Word of caution…be careful and mindful of insurance penalty clauses. Unfortunately, these are never called penalty clauses because the insurance world has its own jargon and the word penalty is bad for marketing. Therefore, look for 2 things (to keep it simple).
First, scan your policy for the word Co-Insurance. Co-insurance means that you need to insure your property or assets for a minimum % of what it’s worth. If you don’t do this, the insurance company can apply a penalty and pro-rate your claim payments. Bad…To identify the penalty clause easily, look for the term “% co-insurance”. It should be listed somewhere in the Declarations pages at the front of your insurance policy. To avoid the penalty, make sure that you are insuring your assets for at least 100% of its true value in order to avoid the penalty. In certain circumstances, you can go below 100% but this needs careful analysis from your broker in order to structure the coverage without jeopardizing any claim payments.
Second, do a “Control-F” search for the words “Payment Basis”. Read through the 2-3 paragraphs that have this term. Payment basis is important because it tells you how the insurance company will pay you. Will they pay the depreciated value or replacement cost? Furthermore, Hhow will they pay if you replace the stolen/damaged/lost good? What if you don’t replace it? These issues are important but, unfortunately, they are buried deep in the contract wording.

Do I have a Legal Obligation to Read?

Although everyone advocates that one must read the entire terms & conditions, this rarely happens in real life. Do you read your Netflix terms & conditions? How about the Apple Store conditions?
Even the insurance industry has gotten into the habit of burying legal disclaimers that advise clients that they must read their entire policy. Although I’m a proud insurance broker, I do not hesitate to advocate against the mentality of offloading our professional responsibility to our clients. Insurance policies are complex contracts and we need to clearly explain coverages and exclusion in laymen terms. At least in the US, courts are split on this. I’m still doing research on the interpretation of this in Canada so perhaps I’ll put together another blog post to clarify.

Caution to those who purchase directly from Insurance Companies (without a Broker)

For those who buy directly from Insurance Companies…caveat emptor (buyer beware). When you are purchasing directly from an Insurance Company (without a Broker), the insurer does not have the same requirements to advise you. Therefore, in these cases, you are actually forced to read every word of the insurance contract in order to grasp what’s covered. For example, and Insurance company salesperson can only relate to the existing product sold by their own company, they cannot compare, contrast or advise on if their own policy contact wording is restrictive. Basically, they have no point of reference so are not held to the same standard.

Conclusion

Use this method to understand most of your policy without necessarily needing to read the entire policy word for word.
First, figure out what type of policy you have (All-Risk vs. Specified Perils). Then start in reverse by reading your Exclusions first. Then go to the beginning of the Policy and read through the first 2-3 pages called Declarations in order to learn about your coverage categories and their amounts. Finally, be mindful of a few insurance Penalty Clauses and watch out for situations where you need to spend more time reading the contract.
This will save you allot of time and help you watch out for some traps. Take these steps and then direct your remaining questions to an insurance professional, you’ll save lots of time and be well protected!

Send us a copy of your policy – we’ll glace through and flag 3 things to watch out for.