Insurance Policy Riders, Floaters and Endorsements...

Endorsement, rider, and floater are insurance terms that are often used interchangeably—but are often misunderstood. In general, they refer to changes made to an insurance policy that modify the policy’s terms and coverage, but they do differ slightly.

For the purposes of your insurance exam, it’s important to have a clear understanding of what makes them similar and where they differ.

Endorsements and riders are the same things. A policy endorsement is an amendment or addition to an existing policy that alters the scope or terms of the original contract of insurance. An endorsement can be used to exclude, add, delete, or otherwise modify the coverage. These can be issued when the policy is bound, mid-term, or upon renewal. It’s legally binding and becomes a part of the insurance contract.

Endorsements are commonly and frequently used in the insurance industry. You may have endorsements issued on renters, home, auto, watercraft, and condo policies, plus all varieties of commercial insurance policies. In fact, most commercial liability policies come with a long list of endorsements added to the normal “boilerplate” policy language.

What about the floater? 

Compared to endorsements, floaters generally provide more comprehensive coverage and can allow for expanded coverage on individually scheduled items. Scheduling an individual item with a floater can be more expensive, but also allows for higher limits for the scheduled item. Valuable jewelry (an engagement ring, for example) that might exceed a limit of insurance if it was lost, damaged or stolen, would make sense to schedule by way of a floater.

Endorsements and floaters remain in force until policy expiration and can be renewed under the same terms and conditions as the underlying policy—unless specified differently in the endorsement/floater language.

Here’s a prime example of how endorsements and floaters differ:

Example: Let’s say you have two wrist watches, each valued at $3,000, and you want coverage for both (for a combined $6,000 of insured value). If your policy's per-item claim limit is $3,000 and your overall jewelry limit is $4,500, your second watch would not be completely insured should something happen to it. In this case, you could purchase an endorsement increasing your overall limit to $6,000 to have adequate coverage for both watches. If you only have one $9,000 watch, then increasing your overall limit won’t help if the endorsement has a per item limitation. Further, some carriers may not even allow an increase that high. However, if you schedule the $9,000 watch using a floater, you are covering that item specifically for its appraised value.

Occasionally an endorsement completely replaces the previous version of the insurance contract. When you move and your address changes, the previous insurance policy with your old address is no longer valid. In this case, the endorsement entirely replaces the previous policy.

Example: Stewart and Kate get divorced and Stewart transfers ownership of the car and house to Kate. As Kate is now the only legally registered owner of the property, she may now request an endorsement to her homeowners and auto policies making the change. The endorsement she receives from the insurance company will now show Kate as the only named insured. This replaces the previous policy and the endorsements will now be the revised contract of insurance.

Here are some common examples of how endorsements and floaters are used, some examples of which may show up on your insurance exam. To successfully pass the insurance license exam, you’ll need to understand the purpose of these endorsements and floaters.

Sewer Backup: A backed-up drain or sewer (also called water backup) can cause substantial property damage. It’s commonly excluded from the homeowners and flood insurance policies. If your policy doesn’t already include drain and sewer backup, consider getting the endorsement - especially if you have a sump pump in your basement. If the pump becomes overwhelmed by a deluge of rain or otherwise stop working, there’s potential for significant damage to the basement and anything kept there. Adding this important endorsement is usually less than $50 annually and is coverage you should definitely purchase.

Musical Instruments & Sports Equipment: Like jewelry, musical instruments and sports equipment have coverage limits. These limits are generally from $250 to $2,500, and may not be enough if you own expensive items in this category. A bucket of baseballs won’t break the bank, but that set of custom Callaway irons in your golf bag might. And when it comes to coverage for instruments, your daughter’s plastic recorder might not be something to be concerned about but a cello, piano or bass guitar could easily have value well beyond your policy’s limits.

Inflation Guard: The inflation guard endorsement will periodically (and automatically) increase homeowner coverage to factor in the additional inflation cost. Though there is an increase in coverage during the policy period, any premium increase won’t take effect until renewal. It’s worth noting that most insurance companies already have this built into their homeowner policies. Your homeowner policy should be reviewed each year, regardless of whether inflation guard is automatically included or added by endorsement. From time to time your carrier may contact you to get a current assessment of the value of your home and its contents.

Refrigerated Property: This is protection for the contents of refrigerators and freezers in case of an electricity interruption. Interruptions caused by mechanical failure or transformer damage are covered. This endorsement generally has a low limit of insurance and a deductible for covered claims. So, unless you have a freezer packed with a large number of expensive edibles, you may decide against this coverage.

Sinkholes: This rider covers damage or direct physical loss to property caused by a sinkhole or “sudden settlement.”  Homeowners policies occasionally provide coverage for “catastrophic ground cover collapse” though it might be strictly limited in scope. Actual earthquake insurance does not provide coverage for sinkholes, including large holes or cracks that can show up on your property. The sinkhole coverage endorsement covers sinkholes where the ground cover collapse has limitations. While sinkholes are rare, if you live in a location with a history of these events, like Florida for example, consider getting this endorsement.

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