IL 00 17–COMMON POLICY CONDITIONS ANALYSIS

(June 2019)

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 that a mandatory state specific form be used 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 the named insured 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.

Example: Jade’s policy runs from 01/01/19 to 01/01/20.

Scenario 1: Jade decides to merge her business with another on 05/01/19. She sends her policy to her agent on 04/15/19 and requests that the policy be cancelled as of 05/01/19. Cancellation will be effective on 05/01/19.

Scenario 2: Jade decides that she does not like this coverage, sends the policy back to her agent on 04/15/19, and requests that it be cancelled as of 03/01/19. In this scenario, the cancellation will not be effective on 03/01/19. The cancellation date will not be earlier than the date the insurance company receives the request.

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.

Example: Faith and Fidelity Insurance Company mails a notice of cancellation to Problem Insured on 04/15/19 to be effective on 05/01/19.

Scenario 1: The reason for cancellation is nonpayment of premium. The cancellation is effective 05/01/19.

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.

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 to Previous Insured

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.

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.

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.

Related Court Cases:

Inspection Of Premises By Insurer Was Not Performance Of A Duty Owed The Insured

Insurer Suit Against Inspection Service Barred By Disclaimer Provision

Loss Prevention Representative Did Not Have Duty to Make Specific Inspection

Safety Inspections For Underwriting Purposes Held Not To Create Liability For Insurer

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.

E. PREMIUMS

The first named insured is the party that pays the premiums and receives all return premiums.

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.

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.

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.

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.