CHAPTER 2 Types, Lines, and Categories of Applicable Insurance
| Jurisdiction | United States |
| Publication year | 2019 |
CHAPTER 2
Types, Lines, and Categories of Applicable Insurance
§ 2.01 Overview
There are two general categories of insurance policies available for purchase by those who want or need insurance, no matter how they are legally structured or whether they are for profit businesses, nonprofits, or other entities and/or persons: (1) first-party insurance and (2) third-party insurance. Within each of these categories, there are two lines—personal lines and commercial lines—applicable to individuals and commercial enterprises, respectively. Within each category and line, there are a number of different types and kinds of insurance policies.
People and businesses involved in real estate, construction, and related industries can purchase a myriad of first-party and third-party insurance policies to protect against risks they encounter on a daily basis. This chapter first sets forth relevant definitions for the “terms of art” that appear extensively in this treatise. It then discusses the meaning of first-party and third-party insurance, gives relevant examples of each, and explains the distinction between them.
§ 2.02 Terms of Art
In insurance parlance, there are certain “terms of art,” which are used throughout this treatise and defined below.
“CGL” refers to comprehensive general liability insurance or commercial general liability insurance, a type of third-party insurance widely sold to cover a large group of liabilities faced by the policyholder.1
“Commercial Lines” refers to a line of insurance that is available for use by and sold to businesses or commercial enterprises, public entities, and nonprofits.2
“Coverage Form” refers to the main body of the insurance policy contract, including many of the essential terms, agreements, conditions, definitions, and exclusions.3
“D&O” refers to directors and officers liability insurance, a type of insurance covering the policyholder for liabilities attributable to third-party liabilities related to actions of directors or officers of an entity and sometimes of the entity itself.4
“Declarations” or “Declarations Page” refers to a form attached to the insurance policy, usually at the beginning or front, setting forth a summary of the terms, including, without limitation, the insurance company’s identity, the named insured’s identity, the limits of indemnity available, the deductible or self-insured retention, the coverages provided, the premium charged, and the forms applicable.5
“Deductible”6 or “Self-Insured Retention” (“SIR”)7 refers to an amount of money, usually set forth in the declaration pages, that the policyholder is responsible to pay out of its own pocket and as a condition precedent to the receipt of insurance coverage under the insurance policy. The deductible or SIR may be on a per occurrence or aggregate basis, meaning the initial liability of the policyholder may be an initial exposure for each claim or loss that is made for coverage or for the total of all claims made during the policy period.
“Duty to Defend” in the third-party loss category refers to the duty of a liability insurance company to provide, or pay for the provision of, a defense for its policyholder in an underlying action.8
“Duty to Indemnify” in the third-party loss category means the duty of a liability insurance company to pay any judgment, jury verdict, settlement, or other legal obligation of its policyholder.9
“E&O” refers to errors and omissions insurance, which is also known as professional liability insurance, a type of third-party insurance covering the policyholder for damages to others caused by the policyholder’s or its employees’ professional negligence.10
“Endorsements” refer to forms attached to the policy form that are intended to change, amend or otherwise modify the terms of the contract as contained in the coverage form.11
“First Party” in an insurance contract refers to the policyholder. The other party to an insurance contract (namely, the insurance company) is considered the second party. First-party insurance is insurance covering losses sustained by the first party—namely the policyholder.12
“Indemnity Limits” or “Limits” refers to the amount of coverage available to pay for: (1) settlements, judgments, or damages assessed as a legal liability of the policyholder under a third-party liability insurance policy or (2) repair, replacement, or damage caused as a result of a covered event under a first-party policy.13 These limits may include other items such as defense costs, depending upon the specific policy at issue.14
“Insurance Policy” or “Policy” refers to the contract under which insurance coverage is sought or purchased.15
“Insurance Company” means the insurer, underwriter, or company that sold the insurance policy to the policyholder for which insurance coverage is sought.16
“Loss” refers to a claim or event for which the policyholder seeks insurance coverage. Losses can be in the form of either first-party losses or third-party losses, depending upon the identity of who actually suffers the loss or damages.17
“Personal Lines” refers to a whole line of insurance that is available for individuals and families for personal or non-business uses.18
“Policyholder” means the purchaser of the insurance policy, the insured, and/or the person or entity claiming a right to insurance coverage under the policy.19
“Primary Layer Insurance” refers to insurance that provides either first dollar coverage or coverage after satisfaction of a deductible or self-insured retention.20
“Third Party” in an insurance contract refers to a person or entity that is neither a policyholder nor the insurance company but who indirectly seeks benefits under the insurance policy as a result of liability of the policyholder to that third party.21
“Trigger” or “Triggering Event” means, as its name implies, the act or event that has taken place to cause an insurance company to owe duties to its policyholder under the terms of its insurance policy.22
“Umbrella Policy”23 or “Excess Policy”24 refer to a type of insurance policy that provides coverage only after exhaustion of coverage of all underlying insurance, including the primary layer. The level of umbrella or excess insurance sitting on top of the primary layer is referred to as “First Layer Excess” or “Umbrella,”25 and each layer on top of each succeeding layer is referred to as subsequently numbered layer excess or umbrella.
“Underlying Action” or “Underlying Suit” in the third-party loss category means the claim, lawsuit, or other action brought by a claimant against the policyholder and for which insurance coverage may be sought by the policyholder (and indirectly by the third party).26
§ 2.03 Third-Party Insurance
Third-party insurance is commonly known as “litigation insurance” because it protects the policyholder from the liabilities and costs associated with litigation brought by third parties.27 Hence, third-party insurance is insurance that provides insurance coverage that, in part, benefits persons who have suffered a loss but who are not parties to the insurance contract (i.e., a third party), as distinct from the parties to the insurance contract—namely, the policyholder (the first party) and the insurance company (the second party).28 That third person who has suffered a loss seeks compensation from the policyholder by way of the assertion of a claim, a civil action, or lawsuit against the policyholders. Third-party insurance provides coverage to the policyholder in the form of both: (1) a duty to defend the policyholder in the third-party suit (or a duty to reimburse the policyholder for defense costs incurred in the third-party suit); and (2) a duty to indemnify or pay any judgments or settlements rendered against the policyholder in such third-party litigation.29
Examples of third-party insurance30 include, among other things: CGL (known as commercial or comprehensive general liability insurance)31 employment practices liability insurance, environmental impairment liability insurance, workers’ compensation liability insurance, employers liability insurance, automobile liability insurance,32 D&O or directors and officers liability insurance,33 E&O or errors and omissions or professional liability insurance,34 and excess or umbrella liability insurance.35
§ 2.04 First-Party Insurance
First-party insurance policies provide insurance coverage that compensates the policyholder for losses that are suffered by the policyholder himself, herself, or itself.36 For example, life insurance pays benefits as a result of the death of the policyholder.37 Likewise, health insurance pays for medical expenses incurred as a result of an illness or injury to the policyholder.38 Disability insurance pays for the loss of earnings as a result of a disabling injury or illness suffered by the policyholder.39 Fidelity bonds or commercial crime insurance provide coverage for theft of the policyholder’s property as a result of employee theft.40
Similarly, homeowners or renters insurance compensates the policyholder for damages to the policyholder’s real and personal property at premises occupied by the policyholder.41 Commercial property and business interruption insurance compensate a business for both damages to its real and personal property and the consequential loss of income during a period of restoration as a result of a covered accident.42
Additionally, builders risk insurance provides coverage for developers and contractors for losses that take place to the property they are developing or building until the project is completed.43 Of course, once operations are completed, the property should be covered by first-party property insurance—either residential or commercial property insurance.
§ 2.05 Hybrid Policies
Some insurance policies are hybrid in the sense they provide both first-party and third-party benefits. In particular, some policies that are commonly thought of as third-party insurance policies have first-party benefits available.
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