North Carolina Adjuster Practice Exam

If an insurer broadens a coverage without an increase in premium, what clause allows such changes to apply to existing policies?

1. Liberalization clause

2. Assignment clause

3. Premium adjustment clause

4. Coverage extension clause

The correct answer is: Liberalization clause

The liberalization clause is a provision in insurance policies that enables insurers to automatically apply certain changes in coverage to existing policies without requiring an additional premium payment. This means that if an insurer decides to enhance or broaden coverage for a particular peril or circumstance, that enhancement automatically applies to all current policyholders who might benefit from it. This helps to ensure that policyholders receive the most favorable terms and coverage without the need for them to actively renew or modify their individual policies. In contrast, the assignment clause relates to the policyholder's ability to assign or transfer their policy rights to another party, which is not directly related to coverage changes. The premium adjustment clause deals with changes in premium amounts due to various factors, rather than changes in coverage itself. The coverage extension clause may outline how coverage can expand in specific scenarios, but it doesn’t necessarily ensure automatic application to existing policies as the liberalization clause does. Thus, the liberalization clause is specifically designed to benefit policyholders by ensuring they receive the newest coverage enhancements without additional cost or effort.