Liberalization Clause
What Does Liberalization Clause Mean?
A liberalization clause is a provision that automatically extends any favorable changes to policy wording to the insured during the policy term, without additional fees or premiums. This clause is typically found in property insurance policies but is increasingly being included in liability insurance as well.
The clause benefits both the insured and the insurance company. For the insured, it allows them to take advantage of beneficial changes to their policy mid-term, without waiting for the renewal period or paying extra premiums (which might occur if coverage features are expanded at renewal). For the insurance company, it helps reduce the costs associated with notifying policyholders about changes to the policy wording.
Insuranceopedia Explains Liberalization Clause
A liberalization clause is common in property insurance policies because insurance companies must comply with any new state regulations. However, liberalization clauses are increasingly being added to liability policies as well, including:
Essentially, a liberalization clause grants insureds the benefits of any favorable changes in policy wording or features during the existing policy term, without charging additional premiums. These clauses generally do not limit the insured’s current coverage when wording changes occur, ensuring that only beneficial changes are applied. However, at renewal, any coverage restrictions may be enforced, or the premium may increase to reflect the expanded coverage.
From the insurance company’s perspective, the liberalization clause is beneficial as well. The insurance industry is highly regulated and constantly evolving. When governments pass legislation that mandates insurers to offer coverage for previously excluded events, the liberalization clause allows insurers to comply without incurring the additional cost of notifying policyholders or charging them for the new coverage. Insurers are not obligated to inform policyholders about these changes, as the benefits are automatically extended, and existing rights are not removed.
For example, if a state passes a law requiring property insurance to cover earthquake damage, that coverage is added to all property insurance policies immediately. However, if the law removes earthquake coverage, the liberalization clause allows the insurer to implement this change without informing the insured. It’s important to note that liberalization clauses typically only provide additional coverage, and restrictions are usually applied only upon policy renewal.
When making a claim, the first step should be to review the policy wording to determine whether the loss is covered. If it is not, checking for a liberalization clause may help. If one is present, an insurance advisor can verify with the insurance company to see if any changes have been made to expand coverage, which could include previously excluded losses. The liberalization clause ensures the insured has access to these positive changes.
