When you purchase commercial insurance, you probably focus most of your attention on obtaining the right type of coverage and sufficient policy limits. While both items are critical, they’re not the only factors that play a role in reducing your risk and protecting your assets.
Every policy includes a number of definitions, and they significantly impact whether a loss will be considered a covered claim under the policy terms. In a hard insurance market like we’re experiencing now, with many carriers restricting coverage, it’s more important than ever to ensure the policy definitions don’t result in an unpleasant surprise if you have a claim.
With the guidance of an experienced broker, you can be sure your policy actually covers what you think it does and what you need it to, based on the policy definitions.
How Do Policy Definitions Affect Your Coverage?
Any time you see a word or a phrase listed in bold type or quotation marks within an insurance policy, that’s a term that the carrier is going to define for the purpose of explaining what is covered and who is covered under your policy.
Whether you’re purchasing new coverage for the first time and comparing options from several carriers, or you’re renewing an existing policy with the same carrier, it’s vital that you and your broker pay close attention to the policy definitions. Two insurers offering the same type of coverage might define the same terms very differently, and many insurers change their policy definitions from year to year. Either scenario has the potential to leave you with the unwelcome surprise of an uncovered claim.
As an experienced attorney in insurance coverage litigation and claims at Miles & Stockbridge P.C., Joe Beavers explains “The definitions in an insurance policy are typically the main drivers for determining what is, and is not, covered. Insurers use the definitions in a policy to delineate their coverage obligations, and policyholders must review key definitions in order to understand the specific risks that are insured under a given policy. This process is not always straightforward. Defined terms are often used within the definitions of other defined terms, creating a maze-like structure of language that requires careful consideration.”
Here are two examples that illustrate the importance of comparing policy definitions across insurers or against your old policy before moving forward.
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On a directors and officers (D&O) policy, one carrier might define the term “subsidiary” very narrowly while another might define the term more broadly. If your company has subsidiaries with their own officers, you need to be sure this definition aligns with how you operate.
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On an errors and omissions (E&O) policy, one carrier might define wrongdoing as extending to your subcontractors, while another only covers your employees. Some E&O policies cover a company’s board of directors and committee members, while others don’t. Since many E&O policy definitions indicate who is (and isn’t) covered in the event of a loss, you’ll want to be sure those definitions don’t create a coverage gap.
Even how you define your business type during the insurance application process can have a big impact on whether a loss is covered. For instance, when buying E&O coverage, many insureds believe they should characterize their business very narrowly to align with the specific services they offer. But the opposite is true: A broader definition of your business type provides greater protection.
That’s especially true if your business decides to offer a new type of service, either to satisfy a client’s request or because you see an opportunity to expand. If you’ve defined your business type too narrowly when applying for the insurance, and you have a loss related to a service that doesn’t fit under that definition, you’ll find yourself with an uncovered claim.
The only time a broad policy definition doesn’t work in your favor is when it comes to policy exclusions. Of course, you want as few exclusions as feasible to increase the odds that a loss will be covered.
Which Businesses are Most Affected by Policy Definitions?
While every insurance policy includes definitions that affect whether a loss is covered, these definitions can prove even more consequential for some types of businesses.
Companies in certain industries, including cybersecurity and technology services, are likely to run into policy definition problems when they purchase professional services insurance. Since the coverage can be difficult for these businesses to obtain, the only carriers willing to write it tend to use narrow coverage definitions.
A company with a diverse product line or service line also might find policy definitions to be problematic. For instance, if your business manufactures tangible products but also provides consulting services on how to use those products, the definitions on a professional services policy might be too narrow to cover you adequately.
How Can You Avoid Policy Definition Problems?
To minimize the odds that a policy definition problem will inadvertently limit your coverage and leave you exposed, it’s best to work with an experienced broker—not just when you’re buying a new policy or renewing an existing one, but also when you’re entering into a new contract with a client or customer.
Contractual obligations often drive the need for certain types of coverage, especially in the professional services insurance arena. Before signing a new contract with a client or customer, it’s best to review the document with your broker to determine if the insurance requirements stated in the contract are feasible and affordable and to ensure your policy definitions don’t create a gap.
In some cases, the best way to reduce the risk of narrow policy definitions is to buy more than one policy for a particular line of insurance. Since each carrier’s policy definitions can vary fairly significantly, layering coverage from multiple insurers may be the right strategic approach to ensuring you’re properly covered.
How B. F. Saul Insurance Can Help
The experienced and knowledgeable advisors at B. F. Saul Insurance can help keep policy definitions from creating unpleasant surprises if your business experiences a loss. We work closely with you to truly understand your business: What type of work are you engaged in now? How do you anticipate that will change over the next 24 months? Who are your biggest clients/customers and what do their contracts require? What concerns keep you awake at night?
We also guide you in defining your business type accurately for insurance purposes, working closely with the carrier’s underwriter to explain your business operations and ensure your company is characterized properly for the best protection. And we explain all policy definitions in layman’s terms, ensuring you understand exactly what and who your policy will cover.
If you’re getting ready to purchase or renew a policy in the coming months, schedule a call with a B. F. Saul Insurance advisor. We’ll review your needs and help you obtain the policy that best meets your goals.
Adrienne Schickert is an insurance advisor with over 15 years of experience in the industry. As Vice President and Account Executive in B. F. Saul Insurance’s Commercial Lines practice, she provides clients with guidance on coverage, appropriate limits, risk management, and claims. Adrienne specializes in advising clients with difficult or diverse operations and helping them manage their risk holistically.