INTRODUCTION
Most Insurance Service
Office (ISO) commercial lines policy require that IL 00 17–Common Policy
Conditions be attached to the policy in order to complete the contract. It
contains six conditions:
A. Cancellation
B. Changes
C. Examination
D. Inspection and Surveys
E. Premium
F. Transfer of Your Rights and Duties under This Policy
A. CANCELLATION
This condition explains
how cancellations are handled. Many states require using a mandatory state form
in place of this cancellation condition but this is a good starting place.
The first named insured
is the only person that can cancel on behalf of the insured. The only thing he
or she must do in order to cancel a policy is to mail or deliver the policy to
the insurance company before the actual date of cancellation.
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Example: Jade’s policy runs from 01/01/16 to 01/01/17.
Scenario 1: Jade
decides to merge her business with another on 05/01/16. She sends her policy
to her agent on 04/15/16 and requests that the policy be cancelled as of
05/01/16. Cancellation will be effective on 05/01/16.
Scenario 2: Jade
decides that she does not like this coverage, sends the policy back to her
agent on 04/15/16, and requests that it be cancelled as of 03/01/16. In this
scenario, cancellation will not be effective on 03/01/16. The cancellation
date will not be earlier than the date the insurance company receives the
request.
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The insurance company can
cancel by mailing or delivering a written notice to the first named insured at
its last known address. The notice must be either mailed or delivered at least ten
days prior to the cancellation date when the reason for cancellation is
nonpayment of premium. The named insured must receive at least 30 days notice
if the cancellation is for any other reason. This notice must clearly state the
date of cancellation because it becomes the policy period's end date.
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Example: Faith and Fidelity Insurance Company mails
a notice of cancellation to Problem Insured on 04/15/16 to be effective on
05/01/16.
Scenario 1: The reason for cancellation is nonpayment
of premium. The cancellation is effective 05/01/16.
Scenario 2: The reason for cancellation is
uncooperative spirit. The cancellation cannot go into effect because the
notice period is too short. The policy continues in force.
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The first named insured receives a return premium when the policy is
cancelled. The return premium must be pro rata of the policy premium when the
insurance company cancels. However, the return premium may be less than pro
rata when the first named insured requests cancellation.
Note: The short-rate penalty is not mandatory but it is a possibility. The
cancellation is in effect even if the insured did not receive the return
premium. Proof that notice of cancellation was mailed is all that is needed to
effect cancellation. Proof that the first named insured actually received the
notice is not required.
Related Court Cases:
Cancellation Held Not Effective When Notice Addressed
Cancellation Validated by Proof Mailing of Notice
Cancellation Notice to Address of Record Held Valid
Was Cancellation Notice Timely?
B. CHANGES
The policy that the
insurance company issues represents the agreement it makes with the named
insured. If the first named insured requests a change, the insurance company
has the right to accept or reject the request. An endorsement that amends,
waives, or changes any part of the policy must be attached to the policy.
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Example: Fergus Farms wants to add a new operation
to its policy. It sends an email to its agent and promptly forgets about it.
A building that is part of the new operation is damaged six months later.
Fergus sends a claim notice to the insurance company. The company denies the
claim because it denies knowing anything about the new operation. The company
also notes that an endorsement was not issued and a premium was not charged.
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Related Court Case: Handwritten Changes to
Declarations Create Coverage Dispute
C. EXAMINATION OF YOUR BOOKS AND RECORDS
The insurance company has
the right to review the named insured's books and records. However, this right
is restricted to only those books and records that relate to this coverage form.
This right extends throughout the policy term and for up to three years after.
D. INSPECTIONS AND SURVEYS
The insurance company has
the right to make inspections and/or conduct surveys. It then may also provide
reports and recommendations to the named insured.
This right is intended
for the insurance company’s benefit. The inspections and surveys are not
intended to be safety inspections for the benefit of third parties or
employees. They should not be viewed as either a warranty or a representation
that the named insured complies with any safety or health codes.
This condition applies to
the insurance company that provides coverage as well as to any rating advisory
organization. The only exception to the inspection being only for the insurance
company’s benefit is when the insurance company agrees to provide mandatory
boiler, pressure vessel, or elevator inspections.
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Example: Grand Insurance
Company insures Toggle
Enterprises. Grand inspects the premises and submits five different
recommendations to Toggle. Toggle does not comply with any of them. Maria is
injured because of a condition that Grand’s inspection identified and submitted
to Toggle. She sues both Toggle (for her injury) and Grand (because it knew
about the condition but did not force Toggle to comply with it). Grand can
use this condition to defend itself against Maria’s claim.
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E. PREMIUMS
The first named insured is the party that pays the premiums and receives
all return premiums.
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Example: John Smith, Mary Smith, Roger Lyons, and
Felicia Brown are the named insureds on the policy issued by Metropolis
Insurance Company. John collects $1,500 from each of the other named insureds
and pays the $6,000 policy premium. The insurance company cancels the policy
mid-term and returns $3,000 to John. He keeps the money. Mary, Roger, and
Felicia do not have any recourse against Metropolis for their portion of the return
premium.
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F. TRANSFER OF YOUR RIGHTS AND DUTIES UNDER THIS POLICY
The named insured does not have the option to transfer its rights and
duties under the policy to anyone.
Related Court Case: Assignment of Policy Is Not Valid Without
Insurer Consent
There is one exception and it applies only when a named insured is an
individual. When that named insured individual dies, all rights and duties
transfer to a legal representative. This transfer is limited because such
representative has such rights and duties only while operating in the capacity
of the named insured’s legal representative. This means that the legal
representative is not covered for any actions outside that capacity.
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Example: Paul is the named insured. He named Jim as
his legal representative if he dies. Paul dies. Jim continues to operate
Paul’s business in order to maintain its value until it can be sold.
Scenario 1: The business and Jim are sued. Jim is
covered because he operates in his role as Paul’s legal representative.
Scenario 2: Jim is sued because a child is injured at
his home. There is no coverage because the injury is not related to Jim’s
role as Paul’s legal representative.
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