Defining Insuring Agreements
What is an insuring agreement?
The basic premise of an insurance policy is a contract, whereby an insurer agrees to pay a financial benefit to the insured in the event of certain losses, in return for premiums paid by the insured at periodic intervals. As such, an insurance policy is a contact and must be construed as such. An essential component of each insurance policy is an insuring agreement. An insuring agreement is a provision in an insurance policy that describes the scope of coverage that the insurer is providing. Typically, the insuring agreement states that coverage is provided in certain circumstances, and then lists certain exclusions. An insuring agreement is one of the basic elements that must exist in order to form a binding contract between an insurer and an insured. The parties must be in agreement on the subject matter of the agreement and the identification of the parties. In other words, there must be an agreement as to who the parties are , and what the subject matter of the agreement is. The Third Circuit has stated that "[a]n insurance policy is best understood as ‘a transfer of risk in which certainty (i.e. payment of a premium) is exchanged for uncertainty’s (i.e., agreement to pay covered losses)." . . . "In other words, through contractual arrangement, individuals exchange the certainty of periodic cash payments for the uncertainty of potential future covered payment . . . ." For example, if someone wants to make sure that he or she is reimbursed for certain costs of automobile rental in the event of an accident in Pennsylvania, then an insuring agreement regarding that risk would provide that insurance coverage in Pennsylvania for car rental costs is provided. On that point in the insuring agreement, the parties can part ways by adding language such as, "up to $15 a day or $300 total, whichever is less." With that amount in the insuring agreement, the parties have agreed on the subject matter of the agreement, and the extent of the risk being transferred from the insured to the insurer.
Variations of Insuring Agreements
Insurance policies often contain insuring agreements. In general, an insuring agreement is the agreement between the insurer and the insured on the primary form of insurance coverage provided by the policy. The insuring agreement in most insurance policies consists of an "if" part and a "then" part. The "if" part of the insuring agreement sets out the loss events potentially covered by the policy. The "then" part of the insuring agreement sets out the obligation of the insurer to make a loss payment if the loss event set forth in the "if" part occurs. An insuring agreement may contain multiple "if" and "then" parts to provide for multiple covered loss events that would trigger a loss payment.
The terms and conditions of insuring agreements vary from policy to policy, but most insurance policies consist of one or more insuring agreements. The type of insuring agreement provided by an insurance policy usually depends on the insurance coverage a policy provides. A life insurance policy contains an insuring agreement that provides the insurer will pay a death payment to the beneficiary of the policy when the insured dies. It also contains an insuring agreement to pay the insured a specific sum when it matures. A health insurance policy contains an insuring agreement which obligates the insurer to reimburse the insured for the payment of covered medical expenses. An auto insurance policy contains an insuring agreement obligating the insurer to pay certain types of damages that are caused by the insured.
The insuring agreement in a property insurance policy obligates the insurer to pay covered property damage losses. It is no longer necessary to include an exclusionary proviso in the "then" part of the insuring agreement in a property insurance policy. The insurance industry endorsement edit which was the basis of this form of an insuring agreement was dropped from ISO and NCCI forms in the early 1990s. The program boilerplate version of the "then" part of the insuring agreement should be used in all insuring agreements contained in a property insurance policy. The "then" part of the insuring agreement now reads: "We will pay you for covered loss or damage caused by or resulting from a Covered Cause of Loss to Covered Property at the premises described in the Declarations."
Most first-party property insurance policies also contain coverage agreements in addition to the insuring agreement, but these coverage agreements provide authorities and powers to the insured regarding the handling of any claims made under the policy. Some policies also contain an additional coverage agreement obligating the insurer to pay certain types of loss or damage for which there is no corresponding insuring agreement. The additional coverage agreements are not insuring agreements, but obligate the insurer to make a loss payment without the insured having to rely on the insuring agreement to be indemnified.
Essential Elements of Insuring Agreements
Broadly speaking, an insuring agreement is a contract in which one party (the insurer) agrees to fulfill a promise made in the agreement, such as restoring the property of the other party (the insured) to its original condition. The insuring agreement is the element of the insurance policy that dictates the extent of coverage, the limits on that coverage, and the conditions under which the insurer must fulfill its promise. Almost every insuring agreement has a coverage term (or coverage form), exclusions, limit or limits of liability, and conditions.
The coverage term (or coverage form), which may be called an insuring clause, is the section of the policy where the insurer promises to make the insured whole if it suffers a loss. Often, the scope of the insurer’s promise will depend on whether the property was damaged, as well as the nature and extent of that damage. This section also contains important information about how the insurer calculates the value of the loss.
From an underwriting perspective, the coverage terms in an insuring agreement are the most important part of the policy and should be the starting point for any evaluation of whether a loss or claim is covered, as well as whether payouts should be expected, or if they should be limited or denied.
The portions of the insuring agreement that contain exclusions describe whether the policy covers certain types of losses. They often list exclusions (often a laundry list, but not always) for things such as war, wear and tear, start-up or shutdown procedures, and computer viruses. If certain exclusions apply, the insurer will either limit or deny coverage under the insuring agreement.
The policy limit or limits dictate the dollar amount a policy will pay for a particular loss. Often, policies identify two limits, one that applies to each individual loss and another that applies to losses during a particular policy period.
The conditions section of an insuring agreement usually specifies what the insured must do to preserve the policy. It requires the insured to do certain things to maintain coverage and provides guidance to the insured on when it must notify the insurer of a loss. Missing notices required by these conditions may result in the complete denial of recovery under the insuring agreement, even if the loss would otherwise be covered.
Common Pitfalls When Understanding Insuring Agreements
One of the most common mistakes policyholders make in understanding insuring agreements is reading the policy language without understanding the context under which that language is rendered and without considering the factual universe within which their policy was issued. Most insurers attempt to write general insuring agreements, deliberately using broad language to apply the same insuring agreement to all policies as opposed to writing individualized insuring agreements responsive to the specific risk insured. Doing so not only allows an insurer to issue the same form of policy to all policyholders without further customizing the insuring agreement to reflect the risk being insured, but it also allows the insurer to cite the insuring agreement language in attempting to avoid coverage in a given case when that language would be misleading if read on its own and without consideration of the applicable factual universe. Policyholders should always consider the meaning of insuring agreement language in the context of their policy – which often includes definitions – and always take into account the factual universe within which their policy was issued, including both elements of the insurance law and customary practices and standards applicable to the risk being insured. Furthermore, with respect to coverage for third-party claims, policyholders should also consider insuring agreement language in light of the rules governing the duty to defend, including the fact that school districts and other municipal governments are entitled to an expansive duty to defend which requires insurers to provide a defense even to claims which even arguably fall outside the scope of coverage.
Impact of Insuring Agreements on Claims Handling
When an insured attempts to file a claim, the insurer’s receipt of that claim starts a process. First, the insurer will determine what laws apply to the dispute, then it will look at the policy to determine if coverage exists, and then it will look to the contract between the insurer and the insured to determine how the claim is handled.
One of the most important components of the insurance policy in this claims process is the insuring agreement. This component can be found in the main body of the policy and at the beginning describes the "who, what, when and where" of the parties’ agreement . As a result, insuring agreements are vital in determining if a policy covers a claim and how the claim should be processed.
Insuring agreements provide information regarding both the scope of the coverage and the extent of the coverage. They inform the reader about: The main purpose of the insuring agreement is to lay out the deal between the carrier and its insured. This deal is set out in writing, and the insuring agreement is one of the most important components of it. The program provides for the insured and the insurer to make good on a promise, and the insuring agreement is the letter of intent that describes the deal.
Legal Requirements of Insuring Agreements
Insuring agreements often times become the subject of disputes and litigation over the terms and scope of coverage. When there is a dispute over an insuring agreement, applicable state law governs the interpretation of the language. A decision on the proper interpretation may be made in summary judgment or after trial. Disputes in this area are often very fact specific.
When interpreting the language of an insuring agreement courts will first examine the four corners of the policy. Courts will enforce a contract according to its terms and will not create an ambiguity if there is none on the face of the policy. Courts will also apply rules of construction when interpreting insuring agreements.
The general rules of construction applied by courts when resolving disputes over insuring agreements are as follows:
Because courts will enforce a contract according to the terms and will not create an ambiguity if there is none on the face of the policy, the existence of an ambiguity in the language of an insuring agreement is not a prerequisite to finding coverage. Courts will look at the plain meaning of the relevant language employed in an insuring agreement. Courts will not create an ambiguity where reasonable understanding of a written instrument would present no matter of doubt.
Many states follow the rule that insurance policies must be interpreted broadly to provide coverage rather than narrowly to preclude it. These courts recognize that insurers may broaden risks. Policies, however, must be interpreted according to their plain terms. No construction should exist if the policy is specific and unambiguous; otherwise, courts would be rewriting an insurance policy, which they are not allowed to do.
Tips for Understanding Insuring Agreements
When presented with an opportunity to review an insurance policy, whether during your initial purchase or when a renewal is offered, you have the best chance of understanding the coverage being offered if you come to the table with questions and an eye toward several key items, including:
- Understanding the insuring agreement. A very brief description of the requirements of the insuring agreement is included in the sections above. Your goal here is to understand what the insuring agreement is seeking to cover. Without a full understanding of this issue, it will be difficult to understand how the possibility of coverage fits into your everyday operations.
- What are the "exclusions"? Exclusions are things or types of coverage which the parties agree are not covered. Every contract, not just insuring agreements, has exclusions. The question to ask yourself is: Why is it specifically excluded? If you know of a pending situation that can be excluded by the plain language of the contract do not assume common sense prevents the exclusion from applying. As you become more experienced reading contracts, you will pick up on nuances regarding exclusions, but early on it is essential to focus on the exclusions to protect against the not-so-uncommon surprise.
- Are there conditions on the coverage? There are usually conditions, things you must do, in order to be eligible for insurance coverage. One example is the requirement that you submit a notice of claim within a certain time frame. In this case , you may want to know if that time frame is reasonable under the facts of your situation. You may also want to know who has responsibility for submitting the notice. The more you know about where responsibility lies, the better.
- Do you understand the terms in the paragraph discussing your responsibilities in the event of a lawsuit? Often times, an insuring agreement will contain boilerplate language that explains how the parties should react in the unfortunate event of a claim or a lawsuit. In practice, the party seeking coverage (here you would be the party seeking coverage under your contract with the insurer) has to fulfill certain obligations. These may include submitting a claim properly, maintaining the possibility of coverage, and possibly more obligations. Do not skip over this section of the policy just because it is boilerplate. The best practice is to educate yourself about these issues so that you will be in a position to follow these obligations without delay.
- Incorporate feedback from consult with your trusted advisors. Whether it is an attorney, an insurance broker, a senior executive in your company, or someone else, make sure that you properly incorporate feedback and advice on the insuring agreement. Sometimes you will get conflicting feedback – one person says that you need to make the insurance company explain the reason for an exclusion, while another says the exclusion is standard contract language. It is important to incorporate feedback and get comfortable with the terms of the agreement.