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Lorraine Roberte is an insurance writer for The Balance. As a personal finance writer, her expertise includes money management and insurance-related topics. She has written hundreds of reviews of insurance products.
Updated on October 27, 2021 Reviewed byThomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas' experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.
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Insurance policy documents contain the nuts and bolts of your policy. They spell out your policy’s terms and conditions, and they’re a reference point for both you and your insurer about coverages, exclusions, rules, and claim procedures. While these policies are essential to read, they’re not always easy to understand. Here, we break down the five parts of an insurance policy so that you can better comprehend yours.
An insurance policy is a legal contract between the insurer (your insurance company) and the insured (the policyholder). Legal agreements aren’t notorious for being fun to peruse, but reading and understanding your entire policy ensures you have the coverage you need and expect under the conditions you assume. Being an informed policyholder can also prevent disagreements between you and the insurer if you need to file a claim for a loss.
The Declarations Page is also called the “dec page,” though it can be longer than one page. It summarizes the key details of your policy, and is the first part you’ll encounter. It should include:
Carefully review your declarations page, and immediately contact your agent or insurance company if you see any errors or missing information. As a legal contract, the policy’s language governs when it is enforced in a court of law.
The “Definitions” section defines common words, narrows their meanings, and helps avoid ambiguity that could work against the insurer in a court of law. Common words may have limited definitions in a particular insurance contract. Defined terms are also listed throughout the policy with special formatting like italics, boldface font, and quotations to show they have special definitions. In general, words that aren’t defined are open to interpretation, but defined ones should be carefully reviewed for coverage inclusions and exclusions.
The Insuring Agreements are typically the main part of the policy. They define who and what is covered by the policy and what the insurer promises to do and not do in exchange for your premium. This could mean paying for bodily injury, property damage, and legal defense costs up to the policy limits in a covered car accident. You might see an Insuring Agreement listed as “Policy Coverage” or another name that indicates it’s about your coverage. Each coverage part could have its own Insuring Agreement.
Insuring Agreements often give a broad overview of the scope of coverage, then narrow it down in the Exclusions and Definitions sections. It’s important to read these three sections together for a clearer picture of precisely what is—and isn’t—covered so that you know you have the coverage you expect.
The Exclusions section typically follows the Insuring Agreements, and lists what your policy doesn’t cover. For example, homeowners policies generally exclude damage from perils like floods and earthquakes. Auto policies may exclude damage from wear and tear. Policies may provide a section for exceptions to exclusions, to avoid having to list all possible exclusions and coverages.
Policy limits are listed on the Declarations Page and describe how they are applied in the “Limits of Liability.” Limitations list the maximum dollar amount or percentage of the total loss (or a combination) that may be reimbursed under the policy in a given claim or period, such as $500,000 to reconstruct your home after a claim, or $1 million annually across all lawsuit claims made under a small-business insurance policy.
While there is likely a section in your policy labeled “Exclusions,” other exclusions may appear anywhere in your policy.
The Conditions section includes the policy provisions that qualify or limit the insurance company’s promise to pay or perform. That means if you don’t meet the conditions laid out here, the insurer could deny your claim. One condition you might see in a homeowners policy is protecting your property after a loss to prevent further damage, or allowing the insurer to inspect a fire damage claim before you begin repairs. Some other conditions may relate to subrogation rights, loss reporting and settlement, or cancellation and nonrenewal.
Take note of language that’s absolute (such as “always” or “never”) or inclusive (“and” or “or”) in your policy. Requiring you to report a car accident to law enforcement and the insurer within 24 hours is different from having to report it to law enforcement or the insurer, for example.
Insurance policies provide peace of mind that you’re protected in the event of a loss. It’s essential to make sure you understand your contract so that you’re confident your premium covers what you expect it does and you can proactively close coverage gaps. While knowing the five parts of an insurance policy can increase your overall understanding of your individual coverage, your insurance agent can review your policy’s intricacies with you so that you can fully comprehend it and make adjustments, if necessary.
