In general, commercial and personal property and liability insurance provides a coverage-broadening condition that is beneficial to insureds. It warrants not only our clear understanding, but an explanation to policyholders, as well. The "liberalization" clause or condition offers a policyholder (without additional premium) enhanced benefits that are adopted by the insurer under a new edition of identical insurance. The provision, expressed in one or two sentences, applies in commercial and personal package policies to both Section I property insurance and Section II liability insurance. It can be applied in two ways.
The first way would involve the insurer's adoption--during the policy period--of policy revisions that broaden coverage at no additional charge. The change is automatically applied to an existing edition of the policy (form or coverage part) effective the date the change is implemented in the state in which the insurer is involved.
The liberalization feature also can be applied to give a policyholder the benefit of broader coverage that is included in a revised edition that was adopted by the insurer a specified number of days or months before the insured's policy became effective. This permits the insurance company to issue policies in advance of the renewal date without having to stop processing or without having to issue endorsements to effect the revised coverage advantages. It is an outstanding example of fairness and care on the part of the insurer.
The function of a liberalization condition is best demonstrated by examples. A revised (1997) edition of businessowners policies (BOP) in widespread use contained coverage enhancements that also benefited holders of 1996 editions of the policies. It included the following coverage extensions:
* Coverage for personal property at newly acquired premises was increased from $10,000 to $100,000.
* The limit for business personal property off premises was increased from $1,000 to $5,000.
* Coverage for outdoor property was increased from $1,000 to $2,500; the sub-limit for any one tree, shrub or plant was increased from $250 each to $500 each.
* Personal effects (distinguished from business personal property) coverage was increased from $1,000 to $2,500.
* Valuable papers and records were newly covered, by extension of business personal property coverage, for a covered loss, subject to a $5,000 limit at a covered location or $2,500 at a location not described in the declarations--with the opportunity for the purchase of higher limits.
* Accounts receivable insurance was newly included by extension of business personal property coverage to apply to the insured's record of accounts receivable, subject to a $5,000 limit at a covered location or $2,500 at an undeclared location--also with the opportunity for the purchase of higher limits.
Agents are constantly dealing with and know the importance of keeping abreast of changes in homeowners policies. To appreciate the value of the liberalization clause, consider the HO limits of insurance provided for certain kinds of high-value personal property.
Each of the homeowners forms basically provides coverage on described classes of valuable and vulnerable personal property in specified limited amounts. These special limits are necessary and proper because of the risk of concentrated high value and the frequency of loss of such property. It is not reasonable to require the majority of insureds without high-valued property to subsidize the lesser number who do have the exposure.
Whenever there is an increase in such special limits in a revision of a homeowners form, holders of policies subject to the previous edition of the form and the liberalization condition will have the expanded coverage. In our own homeowners policies, we've all seen increases in special limits for exposures such as theft of silverware or theft of property from a residence premises used for business, and other items. When this happens, the particulars make a good subject for conversation with insureds over how insurance companies adjust coverage to reflect costs of insured property. The discussion also could bring to light the insured's acquisition of valuable property that requires additional insurance.
The intent of a liberalization clause in a commercial insurance policy or a homeowners policy is to limit its benefits to changes contained in a revision of the identical policy. The provision is a valuable one, but it must be understood that it is not applicable to a new program or to a new form or coverage part bearing a different title and number from the one presently in force.
For example, the American Association of Insurance Services (AAIS) replaced its manufacturers output policy with a commercial output policy. The successor was a new program, involving newly designated forms with different identifying numbers. Previously, the Insurance Services Office (ISO) designed its commercial package policy as a replacement for the special multi-peril (SMP) policy.
These were new programs, involving major changes in coverage and in policy preparation. Broadened protection features of these new policies were not extended to existing predecessor policies by virtue of liberalization conditions in the latter. The liberalization condition/clause was not operative in these situations because an entirely new set of forms was involved. The upshot was that the liberalization provisions in existing policies did not pick up broadened coverage features of those designed to replace them.
In summary, a liberalization provision in an existing policy does not pick up broadened features of a new program or of a form or coverage part bearing identifying titles and numbers different from those in the current policy. It does give the insured the benefit of broadened protection provided by new editions of a specific policy.
Agents should become familiar with the liberalization condition in policies that they arrange, and note language changes in the clauses that are adopted by the insurer. *