How to Read an Insurance Policy

 By: Jim Knight
This article will cover the task of reading the legal contract that every person , business, and organization will see sometime during their life - The Insurance Policy. This will serve as an overall guide to the policy format and language and should be general enough to apply to most insurance policies. Check your own insurance policy for differences in format , language , and coverage.

Specifically, this post will cover the first section of the Insurance Policy, The Insuring Agreement.

The Insuring Agreement of the policy typically outlines what the insurance company is bringing to the table (coverage) in exchange for payment or consideration (premium). Since insurance is considered an aleatory contract , (one that is "triggered" by an event ) the insurance company is stating that the contract or policy will react when something happens. That something gets defined later in a section called "Named Perils" (things that happen to cause a loss: theft, fire, hail, etc).

This section typically reads something like (taken from my own auto policy)...

"We will pay damages for bodily injury or property damage for which any covered person becomes legally responsible of an auto accident . Property damage includes loss of use of the damaged property. Damages included prejudgement interest awarded against the covered person. We will settle or defend, as we consider appropriate , any claim or suit asking for these damages. In addition to our limit or liability, we will pay all defense costs we incur. Our duty to settle or defend ends when our limit or liability for this coverage has been exhausted."

Ok, already some scary legal language there in the first paragraph! Let's break this down to bullet points in laymen's terms:

We (insuring party) will pay if damages occur caused by our insured (typically you or someone you have appointed as an insured) to another person in the event of an auto accident .

We (insuring party) will cover loss of use (inabilit y to use that item) .

We (insuring party) will cover any interest before a court judgement is made.

We (insuring party) will settle or defend the case with or without your approval to protect our (insurance party's) interests.

We (insuring party) will cover the costs of the defense attorneys and court costs if a claim were to go to trial.

We stop paying attorneys and court costs if the insured (you) run out of insurance limits.


By looking at this the first few questions I ask are:

A) Who is an insured on my policy?

B) What are the limits of the policy if my defense is going to be cut off if it were to go to trial?

Let's take a look at the second point as this is a common misconception in purchasing insurance. Currently as of this writing, the Minimum Insurance Limits for the State of Texas are defined as:

-$20,000 per person for death and injuries

-Up to $40,000 per accident

-And up to $15,000 for property damage - or commonly referred to in the insurance business as 20/40/15. So by reading this we can determine that you could be covered for an accident (not including you as we're currently only dealing with liability or damage to others) with damage to each person of $20,000 in medical expense for a total of $40,000 dollars (or more individuals splitting the total bucket of $40,000 of available funds as long as no single person exceeds $20,000 of medical expenses) and property damage (damag e to their auto, building damage , road and street damage , etc.,) of no more than $15,000. Remember, this also includes any court costs and cost to defend the suit brought against you as well as the loss of use of that property.

If you go any further past these limits, you are liable to pay from your own pocket!

Remember, this is the "minimum" state required amount (for Texas) but is often the amount sold by some discount insurance companies for personal auto insurance. This is no where near enough as most cars on the road are worth more than the $15,000 in property damage limit that this establishes in the event of a total loss .

My own policy and most policies that we recommend have limits of 100/300/50 or $100,000 for each person in bodily injury , not to exceed $300,000 for each accident, and $50,000 in property damage . Additional insurance limits can be obtained by purchasing higher limits or adding another layer of insurance called an Umbrella.
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