Liberalization Clause

Updated: 09 June 2023

What Does Liberalization Clause Mean?

A liberalization clause is a provision that automatically extends any advantageous policy wording changes to the insured at any point throughout their policy term without any additional fees or premiums charged. This type of clause is found mostly in property insurance policies, but they are more commonly being included in liability insurance wordings as well.

This clause has benefits to both insureds and insurance companies. For the insured, they are able to enjoy any advantageous changes to their policy wordings mid-term without having to wait until renewal time or to pay an additional premium (which may happen at renewal time if their coverage features have been expanded). Meanwhile, the insurance company is able to save on any expenses required to notify existing policy holders of any changes to policy wordings.

Insuranceopedia Explains Liberalization Clause

A liberalization clause exists in many property insurance policies because insurance companies must comply with every new regulation the state passes. However, liberalization clauses are now being added to liability policies as well, such as:

A liberalization clause essentially affords the benefits of any expansions in policy wordings or features to existing insureds during their existing policy term without any additional premium. Liberalization clauses typically do not act to restrict an insured’s existing coverage if wordings are changed, so only advantageous changes are given to insureds. However, upon renewal, any coverage restrictions will apply or the policy premium may rise to match the expanded coverage.

From an insurance company’s perspective, a liberalization clause is advantageous as well. Insurance is a highly regulated industry that changes constantly. Governments may pass legislation that requires insurers offer coverage for certain previously excluded events. Through the liberalization clause, insurance companies would not need to go through the extra expense of notifying each policyholder or charging each policyholder for the added coverage that a new insurance law may create. The company is not required to notify policyholders of these changes, as they would automatically enjoy the benefits, and insurers are not taking away any significant rights enjoyed by existing policyholders.

For instance, a state may pass an insurance law that compels property insurance to cover earthquake damage. In that case, this coverage is added to every property insurance policy immediately. However, it may also do the opposite: The law may strip every policy of earthquake coverage. Because of the liberalization clause, the company may perform these actions without informing the insured. However, it is less likely to find liberalization clauses that go both ways — usually they only afford additional coverage to insureds and any coverage restrictions introduced mid-term are applied upon renewal.

When one has a claim, the first step should be to check the policy wordings to see whether it is covered or not. If it is not covered, one can check for a liberalization clause. If one is present, an insurance advisor can check with the insurance company to see if any changes were made to expand policy coverages, such that the normally excluded loss is now covered. This is because the liberalization clause will give the insured access to those positive changes.

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