“The best way to learn insurance is to read the policy wording.” These words were echoed repeatedly by my mentor when I first joined the insurance industry. He was right. Our policy wordings are the connection we have to our clients. It binds us to the promises we make, and it embodies the trust between client and insurer but let us face it, it is a lengthy uncoordinated document filled with legal jargon and not easy on the eyes. That is because this document is not written like a textbook. It is a legal binding document designed to hold up in a court of law.
It turns out there is a way to read it for learning purposes, however, it requires some preparation prior to embarking on this journey.
The purpose of this article is to share some thoughts on how to establish the framework that allows one to pick up any insurance product and make it readable. Think of it as a conversion kit for changing an insurance policy wording into a textbook.
See printout of the framework below:
On the top right there are Seven (7) Principles of Insurance. Before reading a policy wording, or learning a new concept in insurance, give these seven (7) principles a read over (The 7 Principles of Insurance Contracts: When You Need A Lawyer | MCMINN LAW FIRM). They are the constitution that all insurance policies are based on. Every clause, paragraph or statement in a policy wording cannot violate any one of these seven principles. They are the pillars that hold up the logic of insurance.
The framework then separates into five sub-categories.
They are:
1) Operative clause
2) Expansion
3) Retraction
4) Elaboration
5) Simulation
Here is the breakdown:
1) Operative clause:
The operative clause of an insurance policy is that opening statement that tells the reader what this product is for It is sometimes under the heading “Operative Clause” but can also be hidden in the preamble, or somewhere else, but likely located towards the beginning of the policy. It states the intention of this insurance product, and it immediately eliminates all the perils that are not part of this insurance offering.
Here is an example from a Medical Malpractice policy wording:
The Insurers will indemnify the Insured in accordance with the terms and conditions of the terms stated herein for bodily or mental injury to, illness, disease or death of any patient or person caused or alleged (other than by the Insured) to be caused by Malpractice arising out of the Business/Profession of the insured.
This operative clause clearly states the intention of the policy and narrows the scope of perils to something explicit. It is clear that you cannot claim for damages to your car in a motor vehicle accident or claim for damages arising from a cyber-attack. Identifying the operative clause is important and every clause you read going forward must be done with the operative clause in mind. It does not fall away after you read it. So, once you identify it, write it down or circle it. Just whatever happens, do not forget about it!!!
2) Expansion:
The operative clause is clear but sometimes it is not enough to communicate the exact extent to which cover is offered. Often you need to expand on it. Hence, we have clauses in the policy that expand cover beyond what is stated in the operative clause. As you read on in the policy you will come across various clauses in the form of extensions. These clauses and terms are the bells and whistles of the policy. They are additional benefits to the client and are intended to increase the insurers exposure in order to create more benefits to the clients.
For example, the medical malpractice policy’s operative clause clearly does not encompass legal fees incurred in defending a medical malpractice claim, but the insured offers an extension in the policy that includes this cost.
The Insurers will pay all Costs and Expenses incurred with the written consent:
5.1 in the defence or settlement of any claim under this policy.
5.2 in the representation at any Inquest, Accident Inquiry in respect of Injury which may form the subject of indemnity by this Policy, and/or defending any proceedings in a Court of Summary Jurisdiction in respect of matters which may form the subject of indemnity by this Policy.
This is clearly not included in the operative clause, hence the need to specify it as an extension. This is an example of “Expansion.” As you read your policy wording, identify all the clauses where you are expanding or extending cover beyond the initial operative clause.
3) Retraction:
Retraction is the exact opposite to expansion. Retraction is a reduction in cover to what is promised in the operative clause. The simple narrative of an operative clause can result in the unintended inclusion of a large number of perils and quite often the insurers do not wish to include these perils in the policy, hence the need to specify an exclusion. Just as extensions extend cover beyond the operative clause, exclusions are designed to reduce cover given in the operative clause.
Example:
The Insurers will not indemnify the Insured for claims arising out of or as a consequence of clinical trials of drugs.
Had a medical malpractice claim arisen from the use of medication still under clinical trials, this would be covered as per the operative clause. But clearly the insurers do not intend on covering such a loss. Hence the need to exclude it. This is an example of a retraction of cover. These clauses reduce the insurer’s exposure and lower the scope of coverage for the insured. As you read your policy wording, identify all the clauses where you are retracting or excluding cover within the initial operative clause.
4) Elaboration:
There are clauses that neither reduce nor expand on the operative clause. Sometimes a clause simply elaborates a well-known fact and sometimes they state the obvious that everyone already knows. The reason for this is to eliminate grey areas. Where grey areas exist, benefit of the doubt swings in favour of the insured, hence insurers ought to go out of their way to clear up any ambiguity.
Often these clauses simply elaborate the principles of insurance, which is why it is so important to write them down in the corner of your page prior to reading a policy wording.
Example:
It is condition precedent to the Insured’s right to indemnity under this Policy that the Insured shall notify the Insurers immediately upon becoming aware of any claims or any fact circumstance or event that may give rise to a claim (not having been disclosed to Insurers) during the period of proposal and the date of inception.
This clause is an elaboration on the principal of Good Faith.
The Insured shall take all reasonable precautions to prevent claims and shall give notice as soon as possible of any fact or event which materially affects the risks covered by this Policy.
This clause is an instruction to the insured to uphold the principal of Loss Minimisation.
Elaboration clauses are also an opportunity for insurers to communicate to their insured how they wish for them to conduct themselves during the period of insurance or following a claim.
The Insured shall take all reasonable precautions to prevent claims and shall give notice as soon as possible of any fact or event which materially affects the risks covered by this Policy.
This clause is an instruction to the insured to uphold the principal of Loss Minimisation.
The Insured shall not without the Insurers’ consent waive any right of recourse against any agent, correspondent, external consultant or other person with whom the Insured may be associated.
This is a clear instruction of what not to do in the event of a claim regarding their rights of recourse.
5) Simulation:
If you come across a clause and you want to have a deepened understanding of its role in the policy wording, run a simulation. Imagine a possible scenario and then remove this clause from the wording.
- How does the scenario change in the absence of this clause?
- Is the event suddenly not insured?
- Does the insured now have less or more cover?
- How does it affect how a potential claim is handled?
- Does it change the quantum of a claim?
The more creative you can get with this part of the reading exercise the deeper your understanding will be of the policy wording you are attempting to learn. It also helps to understand the various legislation and reinsurance treaties backing an insurance product, as they also play a crucial part in directing the terms of an insurance policy.
The above article is just one of many ways for a novice insurance professional to learn a new insurance product. This particular way is what helped me personally learn across multiple lines of insurance products, including the notoriously complex marine insurance wordings.
I wish you all best of luck and I hope this helps.
Article Written by Tash Moodley
