Why is business insurance so complicated?

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Why is business insurance SO complicated?

Most businesses have at least one insurance policy. However, many business professionals, including some who work in risk management areas, may not fully be aware of what coverage is provided.

An insurance policy is a legal contract, and failing to understand the terms of a commercial insurance contract policy can put a South Carolina business at a disadvantage should a loss occur. Although policies do vary, most general liability policies share similar components. This article addresses the basic anatomy of a commercial insurance contract. In the coming weeks, we will address specific areas of concern for Columbia, SC and Lexington, SC, businesses.

Key components in a commercial insurance contract

In basic terms, a commercial insurance contract transfers the risk of loss from one party (the insured) to another party (the insurer). In return for the payment of certain premiums, the insurer promises to pay the insured, or third parties on the insured’s behalf, an amount of money for a covered loss.

General liability policies can cover common losses arising out of the conduct of a business; including products and completed operations, contractual liability, bodily and personal injury and advertising liability. Below are the key structural components:

  • Declarations Page: The first section of the commercial insurance contract identifies the insured, the risks or property that are covered, the policy limits, and the policy period. It is imperative to verify that the name of your business is correct and that the premiums, policy limits, and policy period reflect what was discussed with your agent.
  • Insuring Agreement: This section describes the insurer’s duties under the contract. For instance, the insurance company generally promises to pay losses for covered perils, provide specified services, and agrees to defend the insured in a liability lawsuit. 
  • Exclusions/Limitations: This section removes certain perils, losses, and/or property from coverage under the policy. Examples of common exclusions in general liability policies include items covered under other policies such as workers compensation liability, unemployment, and disability law obligations; and liability under the Employee Retirement Income Security Act (ERISA). 
  • Conditions/Warranties: This part of the insurance policy sets forth the conditions that must be met in order for coverage to apply when a loss occurs. It is important for a policyholder to read this section from time to time, and when a claim occurs, because non-compliance can be grounds for the insurer to deny coverage. Common requirements may include various notice requirements, filing a proof of loss with the company, safeguarding property after a loss, and cooperating with the insurer’s investigation or legal defense.
  • Endorsements/Riders: Insurers often amend the terms of the original insurance contracts upon renewal. Endorsements and riders are silently used to make additions, deletions, or modifications to key terms of the policy — so it is important to notice and review them whenever they are received.

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