A commercial property policy has a $500,000 limit. The insured suffers a $750,000 loss from a covered peril. The policy also contains a Liberalization clause. Two weeks after the loss, the insurer introduces a new, broader policy form that would have increased the coverage limit to $1,000,000 for the same premium. How does the Liberalization clause affect the settlement of this loss?
- AThe Liberalization clause is irrelevant because the new form was introduced after the loss occurred.
- BThe policy limit will automatically increase to $1,000,000 for this loss.
- CThe clause only applies if the new form offers a lower deductible, not a higher limit.
- DThe insured must pay an additional premium to receive the benefit of the new form.
Show answer & explanationAnswer & explanation
Correct answer: A. The Liberalization clause is irrelevant because the new form was introduced after the loss occurred.
A Liberalization clause states that if the insurer broadens coverage under a policy form without additional premium, the broadened coverage automatically applies to existing similar policies. However, this typically applies only if the change takes effect during the policy period AND before the loss occurred. Since the new form was introduced after the loss, the Liberalization clause does not apply to this specific loss.
Why the other options are wrong
- B. Liberalization clauses apply to changes made during the policy period and before the loss.
- C. The clause applies to any broadening of coverage, not just deductibles.
- D. Liberalization applies when coverage is broadened without additional premium.
Liberalization Clause
A provision in an insurance policy that automatically extends any broadened coverage introduced by the insurer to existing policies, without additional premium, provided the change occurs during the policy period and usually before a loss.
- Broadens coverage without extra cost.
- Applies to existing policies.
- Typically requires change to happen during policy period and prior to loss.
Memory trick: Liberalization is a 'before the loss' bonus.