What is a policy in insurance?

An insurance policy is the formal contract between the insurer and the policyholder that sets out the terms of cover, the premium, the sum insured, the excess, exclusions, and the rights and duties of both parties. Policy documents are dense legal contracts, but Australian law requires insurers to provide a Product Disclosure Statement (PDS) and a Key Facts Sheet that summarise the most important terms in plain English.

Most Australian insurance policies have a common structure. The Schedule lists the specific details: the policyholder, the insured property or person, the period of cover, the sum insured, the excess, and any special conditions or endorsements agreed during application. The Policy Wording (or Product Disclosure Statement for retail policies) sets out the standard terms and conditions: what is covered, what is excluded, how to make a claim, the duties of the policyholder, and the rights of cancellation.

Three categories of provisions are particularly important. Insuring clauses describe what risks are covered and the maximum amount payable. Exclusions list circumstances where the insurer will not pay (such as deliberate damage, war, nuclear events, ordinary wear and tear, or damage from inadequate maintenance). Conditions place obligations on the policyholder, such as taking reasonable care, notifying the insurer of changes that affect risk, paying the premium, and notifying the insurer of a claim promptly.

The Insurance Contracts Act 1984 governs how policies are interpreted and enforced. The Act prohibits unfair contract terms in standard-form retail policies (a reform that took effect in April 2021), allows insurers to refuse claims only when the policyholder has breached a condition that was relevant to the loss, and requires insurers to explain the duty of disclosure clearly before the contract is signed. Cooling-off periods of at least 14 days apply to most retail insurance policies, letting the policyholder cancel and receive a refund within that window. Policies should be reviewed each year before renewal to confirm that the sum insured still reflects current values and that any changes in family, vehicles, or property are reflected in the cover.