6.1.2 What is covered by an insurance policy

Your insurance policy spells out your coverage: what events are covered, for how much money, and over what period of time. The policy includes clauses called exclusions, which tell you what is excluded from coverage. Make sure you read the policy carefully so you know what coverage you have.

These conditions apply to most insurance policies:

• Insurance does not cover deliberate damage caused by the insured person.
• Insurance covers only the time period stated in the contract (the term).
• You may not be covered if you do not mitigate the damage—that is, take reasonable steps to prevent the damage from becoming worse. For example, if your home is being damaged from water leaking from the roof, and you do not cover the hole, your coverage may be limited.
• Compensation is usually based on the actual cash value of the property "as is," when the damage occurred. For example, if your five-year-old television is stolen, you will be compensated for the value of the used television, not for the value of a new one. However, your policy may compensate you for the cost of replacing an item at its current price (its replacement value), or you may be able to buy additional coverage for replacement value.
• You must inform the insurer of any factors that might affect the risks that the policy covers. The insurer could refuse to compensate you if you misrepresent the risks.
• Insurance may become void if you do not pay your premiums on time.

Definitions

• Coverage: The amount of protection you have purchased; also, the maximum amount of money the insurance company will pay you for a claim
• Exclusions: Things that are not covered by your policy
• Damage mitigation: The obligation to limit the amount of damage to your property, to the extent reasonable, once the damage starts to occur
• Term: The time period covered by the insurance policy
• Actual cash value: Compensation for an item in its current condition, including deprecation
• Replacement value: Compensation for an item at the price it would currently cost to replace it, without depreciation
• Misrepresentation: Failure to fully and honestly disclose all information that could affect an insurer's decision about whether to insure you and what price you will pay; it may allow the insurer to void the policy and refuse to pay any claims