Three Key Terms Business Insurance Policyholders Should Understand

While it’s a good idea to read your insurance policy, hardly anybody does. The important thing is to understand what’s in it. Here are three concepts to know about how your insurance works.

What is Subrogation and How Does It Apply to Insurance?

Subrogation in the context of insurance is the right of an insurance company to “step into the shoes” of the insured after the company has paid the loss. Subrogation entitles the insurance company to assert any rights on its own behalf that the insured may have had to recover payment from the parties that caused the loss.

Subrogation shows up across various types of insurance policies:

• Auto insurance: If you have collision coverage, your insurer pays for repairs regardless of fault. If another party caused the damage, your insurer may pursue that party to recover what it paid.
• Workers’ compensation: If an injured worker is compensated due to malfunctioning equipment, the insurer may subrogate to the worker’s right to sue the manufacturer for reimbursement.
• Property leases: Mutual waivers of subrogation are common, where landlords and tenants agree not to seek recovery from each other’s insurance. Most policies permit these waivers—so long as they’re agreed to before the loss.

Proximate Cause vs. Immediate Cause

Coverage disputes often hinge on the definition of “cause.” Even if a policy is labeled “all-risk,” there must be a close connection between the covered cause and the resulting damage. This is known as “proximate cause.”

Black’s Law Dictionary defines proximate cause as “that which, in a natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without which the result would not have occurred.”

Proximate cause is not the same as the “immediate cause,” which may be the last event before the loss. For example:

• Basic property insurance: It may not cover water damage—but if a fire leads to firefighting efforts that cause water damage, the policy may still cover the loss, because the fire was the proximate cause.

Many cases are not this clear-cut, and courts often side with the insured when a policy’s wording is ambiguous.

Key Exclusions in Business Owner Property Policies

Even robust policies include exclusions that limit coverage. These exclusions can have critical consequences depending on the type of loss:

• Flood and earthquake: Typically excluded unless a separate rider or policy is purchased. Many businesses falsely assume they’re protected until disaster strikes.
• War, nuclear hazard, and government action: Standard exclusions in nearly all property policies.
• Wear and tear, rust, deterioration: Ordinary aging of property isn’t covered.
• Dishonest or criminal acts: Losses caused by fraud or illegal conduct by the insured (or their employees) are excluded.
• Mechanical breakdown: Many BOP policies exclude this unless added via endorsement.
• Mold, fungi, bacteria: Covered only under very specific conditions, often with strict limits.
• Business interruption exclusions: Coverage only applies if the cause of interruption is a covered peril—so exclusions can quickly derail a claim.

Reading exclusions carefully can be the difference between a covered claim and a surprise denial.

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In this issue:

This Just In ... The Property &Casualty Insurance is showing signs of softening, especially after several years of steep rate hikes

Cybercrime in the U.S. — Escalation and Adaptation

Three Key Terms Business Insurance Policyholders Should Understand

The State of D&O Insurance in 2025

Emerging D&O Risks That Demand Board-Level Attention

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