An insurance overview.

The importance to individuals and businesses of at least a basic understanding of insurance cannot be overemphasized. Given the high cost of litigation, defendants and their lawyers should always find out at the beginning whether there is insurance to pay for the defense to the lawsuit, or to pay any settlement or judgment. A plaintiff's ability to recover on a judgment may depend on whether there is an insurance "deep pocket" to pay. Individuals and businesses who suffer a theft, fire or other property loss should also look to their own insurance policies to find out who will bear the loss.

An insurance company that issues a property insurance policy agrees to pay the insured for losses which he suffers to his own property. In the personal lines context, this means, for example, houses and personal property. In the business context, property insurance includes coverage for plants, equipment and inventory. It may also pay for lost income when a company is shut down while the business is rebuilt.

Liability or casualty, insurance protects people or businesses in case someone makes a claim or files a lawsuit against them. This includes claims for personal injuries, claims that a business' products injured someone and business torts, among other things. There are two major coverages in a liability policy: defense and indemnity. The defense coverage pays for the lawyer to defend the insured. The indemnity coverage pays settlements or judgments.

The first page to find when examining an insurance policy is the declarations page. This page is essentially the guide for the rest of the policy. It will state who is insured under the policy, or state where to find that information. It will contain information as to the period during which the policy is in effect and the amount of insurance provided. It will list the other forms that the policy contains and will state the type of insurance that the policy provides. The name of the insurance company that issued the policy will be listed.

When analyzing an insurance policy, it must be determined whether the person making the claim was an insured, whether the policy was in effect at the pertinent time, whether the property location was an insured location and whether the type of insurance needed is part of the policy. For example, a property policy is not likely to be any assistance to an insured who is sued.

It must be determined whether the entire policy is in the reader's possession. Sometimes renewal policies will only include a new declarations page and, perhaps, some new forms. An earlier version of the policy must be found for the remaining policy terms. Endorsements add to or change policy provisions. They may be issued with the original policy or added later. Insurance companies generally number the forms that they attach to the policy. The declarations page lists all form numbers. This list should be checked to make sure all forms are present before the policy review is completed.

Property Insurance

Property insurance applies when the insured suffers damage to his own property. In the case of a fire loss, for example, after checking the declarations page to determine that the property location is insured and the policy was in force when the fire occurred, the property insurance forms are examined. First to be checked is the description of the property covered. A standard homeowners policy will insure damage to a dwelling building, structures that are appurtenant to that building (for example, detached garages), personal property and additional living expense.

There are two main types of property policies -- all risk and named perils. An all risk policy, which is commonly issued as part of homeowners and business property policies, agrees to pay for any physical loss that occurs to property, regardless of the cause, unless the cause of loss is expressly excluded. Named peril policies, which are common for personal property coverage and in California FAIR Plan policies, insure only against the specific causes listed in the policy.

Under all risk policies, the insured need only show that a loss occurred. It is then the insurance company's responsibility to pay for the loss or show that an exclusion applies. With a named peril policy, on the other hand, the insured must establish that the cause of loss is covered.

Sometimes the terms of insurance policies do not mean what they seem to say. Courts tend to look for ways to find coverage if at all possible. For example, most homeowners policies state that they do not cover damage caused by earth movement. Nevertheless, courts frequently rule that insurance companies must pay damages resulting from earth movement if another, covered, cause set the loss in motion. A common situation involves earth movement. It may turn out that any landslides that occur this winter in areas which burned in the recent brush fires. If the landslide occurs because the vegetation on the slopes has burned away, a court may find that fire, not earth movement, is the cause of loss. If so, since fire is not excluded, under an all risk policy, the loss would be covered.

In the business context, property insurance comes into play not only in the usual fire and theft situations, but also at some less obvious times. Environmental claims are increasingly common. The cost to clean up chemicals or petroleum products from the land or water is extremely expensive. Businesses that had less stringent controls on those substances in the past than now exist may find themselves obligated to spend hundreds of thousands or millions of dollars to clean the soil and water. Even current owners of property on which past owners spilled chemicals may be responsible. The question of whether the business or its insurance company must pay for that clean up may be the difference between prosperity and bankruptcy for the business. The courts are still wrestling with the issues that this situation raises.

Many other issues may arise when there is a property loss. It is best to notify the insurance agent of the loss and let the insurance company consider the claim, even if it may not be covered. If the insured has any doubt about his rights, consulting with a lawyer who specializes in insurance coverage issues can be of tremendous value.

Liability Insurance

When a person or business is sued, it is often a loser, regardless of the outcome of the case. This is because the cost to defend against that lawsuit can be very high. It is, therefore, extremely important to purchase insurance that will provide a defense, and then to give the insurance company a chance to defend if a lawsuit filed.

The duty to defend is much broader than the duty to indemnify against any judgment. The California Supreme Court has recently reiterated that the insurance company must pay for the defense if there is any potential of coverage. Even if the allegations in the complaint are false, a defense will be owed if the claim would be covered if those false allegations were true. Because of this rule, and because insurance policies are interpreted very broadly in favor of coverage, insurance companies may step in and settle a case even if coverage is questionable. While the insurance policy will have a limit to the amount of money that will be paid for a judgment or settlement, there is often no limit to the defense obligation.

Before there will be a duty to defend or indemnify, the claim must be insured. In order to determine this, the insuring clause must be examined. That clause will say what the insurance company agrees to do. For example, it will often state that the insurance company will pay on the insured's behalf all sums which the insured becomes legally obligated to pay because of bodily injury, property damage, advertising injury or personal injury which is caused by an occurrence. They may provide coverage for copyright infringement, malicious prosecution, damage to people or property and other types of events.

Liability policies also have exclusions that may apply to a claim. For example, damage which the insured intentionally causes will be excluded from coverage. A close reading of the policy, and knowledge of applicable law, is necessary before one can be certain as to whether a liability claim is covered.

Other Provisions

There are many other provisions in the "sea of print" that constitutes insurance policies. The effective term of the policy is important. The limits should be checked. There will be definitions for many of the words that are used. The policy will set forth the responsibilities of the insureds when a claim occurs. Failure to pay close attention to these items can impact whether, when or how a claim is paid.

There are also many other types of insurance, including surety bonds, automobile insurance, worker's compensation insurance, directors and officers liability insurance and professional malpractice policies. All have their own rules and coverages that apply. Except for very simple claims, it may be wise to consult with a lawyer or other professional to guide the insured through the insurance claim in order to ensure that all appropriate insurance protection is provided.

Gene A. Weisberg is an administrative partner at Cummins & White Lawyers, a commercial law affiliate in Los Angeles.