Research insurance policies carefully to find best fit

“Akamai Money” seeks out local experts to answer questions about business in Hawaii. If you have an issue you would like us to tackle, please email it to business@staradvertiser.com and put “Akamai Money” in the subject line.

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QUESTION: What should I know about purchasing insurance?

ANSWER: Insurance policies are complex instruments. Policyholders may be inclined to accept the terms of a policy and pay a premium without fully understanding the terms. Careful study and negotiation may result in more favorable terms.

Q: What are policy exclusions?

A: Polices frequently have exclusions, which take away coverage under specified conditions. For example, in a general liability policy, liability assumed under a contract is typically excluded. The insurance company bears the burden of showing the exclusion bars coverage. Exclusions are strictly construed so that ambiguities are deemed to favor the policyholder and against the insurance company.

Q: What are endorsements?

A: Typically, the insurance policy includes the standard printed form policy and endorsements. Endorsements are the result of negotiations between the insurance company and the policyholder for coverage or conditions not present in the standard forms. Endorsements must be reviewed carefully because they frequently amend the policy by limiting or taking away coverage. However, endorsements may also grant additional coverage or remove the effect of exclusions.

Q: What if the policy provisions are ambiguous?

A: If there are reasonable arguments for and against coverage under the policy language, an ambiguity exists. To resolve the conflict, insurance policies are construed liberally in favor of the insured. In other words, any ambiguity must be resolved against the insurance company. The Hawaii Supreme Court has explained that insurance policies are construed in accordance with the reasonable expectations of a layperson.

Q: When should you submit a claim to your insurance company?

A: The policyholder should never hesitate to make a claim. Even if coverage appears questionable or unlikely, a claim should be submitted to force the insurance company to make an evaluation on coverage. If the claim is denied, the insurance company should point to portion(s) of the policy on which it relies. If the policyholder disagrees with the denial of coverage, a letter arguing for coverage is entirely appropriate.

Q: What is the difference between an "occurrence" and a "claims made" policy?

A: An "occurrence policy" provides coverage if the event insured against (the "occurrence," typically defined as an accident) takes place during the policy period, irrespective of when a claim is presented. Therefore, if there is an accident during the policy period but it is not discovered until after the policy period ends, there is still coverage. Under a "claims made" policy, however, the claim must be presented during the policy term to trigger coverage, regardless of when the event occurs.

Q: What are deductibles and self-insured retentions?

A: Under a deductible, the insured must pay the amount of the claim up to the deductible amount prior to any obligation on the part of the insurer. Therefore, the amount of the deductible reduces the amount of insurance provided under the policy. Thus, with a $10 million policy and a $100,000 deductible, the amount of insurance is $9,900,000. With a self-insured retention, the insurer agrees to pay the excess of the retention amount. The amount of the insurance is not reduced, but only begins to apply over and above the amount of the self-retention.

Deductibles and self-insured retentions are attractive because they reduce premiums. But it is important to carefully consider, in return for lower premiums, how much the insured will have to pay out of pocket when facing a potential disaster before the insurance actually kicks in.

Q: What is duty to defend?

A: One of the most important aspects of a liability or third-party policy is the insurer’s duty to defend if the policyholder is sued. A general liability policy typically states the insurer has the right and duty to defend any suit against the insured seeking damages because of bodily injury or property damage, even if the allegations in the suit are groundless, false or fraudulent. The duty to defend is broader than the duty to pay claims.

To determine whether it has a duty to defend, the insurer must look to the allegations made in the complaint against the policy holder. If there is any possibility that coverage exists under the terms of the policy, even if remote, the insurance company must defend. All doubts as to whether a duty to defend exists are resolved against the insurer and in favor of the insured. Moreover, if only one claim in a suit raises the possibility of coverage, the insurance company must defend the entire suit.