University of Maryland Extension

How does insurance work?

Nicole Cook, B.S., J.D., LL.M., Environmental and Agricultural, Faculty Legal Specialist, Agriculture Law Education Initiative (ALEI), University of Maryland Eastern Shore

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An insurance policy is a contract. Generally, the parties to the contract are the policyholder (the “insured”) and the insurance company (the “insurer”), and the terms of the insurance contract spell out the rights and responsibilities (or “duties”) of both parties. Basically, the insured’s duties are listed in the conditions section of the policy and they include paying premiums on time, being honest and acting in good faith and not making any misrepresentations in applying for the insurance, notifying the insurer of any changes that are material to the protections (“coverage”) provided under the policy (for example, if you add another vehicle that your employees use to do their work or you build a new addition onto a building you use for the farm), providing notice of a loss as set out in the policy (within a certain timeframe and through certain means) and cooperating with the investigation and legal defense of a loss or claim. Failure to fulfill any of the duties is grounds for breach of the contract, cancellation of the policy and forfeiture of the premiums paid. The insurer’s duties are to also act in good faith and fair dealing in handling claims, to pay the losses suffered by the insured or a third party as a result of a covered risk, and under liability policies, to also defend or pay the legal expenses of an insured who is subject to a legal action for the covered risk.

Insurance policies are not the easiest contracts to understand. Ask other businesses for recommendations for insurance agents to contact when you’re shopping for insurance. You can get quotes from different agents for no cost. And, although your insurance agent can provide information about what the policy covers, it is prudent to have an attorney review the policy to make sure it will be able to provide the protection that you want in the event of a loss. The legal costs and potential liabilities as well as the loss of your time in trying to get payment from the insurance company is worth the small fee that an attorney will charge to review your policy. The time to find out that your policy does not actually cover what you thought it did is not after a loss has occurred.

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