Liberalization Clause

A liberalization clause is an insurance policy provision allowing adjustments to existing coverage to comply with changes to laws and regulations. Property insurance is the most likely place to find a liberalization clause.

In the United States, each state primarily regulates the sale of insurance policies. State laws determine required coverages and limits, set liquidity requirements insurance companies must meet to sell policies, and govern insurer insolvencies.

One issue that insurers must contend with is regulatory change. Amended insurance regulations may result in underwritten policies being out of compliance. Insurers will add a liberalization clause that adapts to regulatory changes, even if the changes happen during the policy period.

Including a liberalization clause allows insurers to expand coverage to comply with regulatory changes without issuing a new policy endorsement and notifying the policyholder. This clause enables the insurer to broaden the risks that a policy covers without requiring an additional premium from the policyholder. Regulatory changes only affect existing policies that include a liberalization clause since policies issued after the change will include coverages that match changes in regulation.

For example, an insurer sells a property insurance policy that contains no coverage for damage to storm shutters but does contain a liberalization clause. Later, the state legislature passes a new law requiring insurance policies to include coverage for storm shutters automatically. Because of the added liberalization clause, the insurer automatically extends coverage to existing policies without increasing premiums.

In some cases, changes to insurance regulations may limit coverage. For example, state lawmakers may pass new legislation removing the requirement of storm shutter coverage. This change reduces the coverage that future policyholders will have, but it will not impact existing policyholders. Liberalization clauses do not restrict benefits not already provided.

Both policyholders and insurance companies benefit from the inclusion of liberalization clauses. Policyholders receive beneficial coverage not bought with the original policy. Also, insurance companies benefit because they do not incur the administrative costs associated with notifying insured parties of new regulations.