Insuring Agreement
What Does Insuring Agreement Mean?
An insuring agreement is a section of an insurance contract in which the insurance company specifies the exact circumstances under which it will provide coverage in exchange for premium payments.
For example, in an auto insurance contract, the insuring agreement will specify that, in exchange for payment, the insurance company will cover sections A (legal liability), B (accident benefits), and C (physical damage), subject to the terms outlined in the contract. Later sections of the insuring agreement will provide detailed explanations of the coverage for each of these sections.
Every insurance policy contains five key parts:
- Declarations
- Insuring agreements
- Definitions
- Exclusions
- Conditions
The declaration page lists important information, such as the name of the insurance company, the insured party’s details, and property or vehicle information. The insuring agreement outlines the specific items and circumstances the insurance company will cover in exchange for the premium. The definitions section specifies the exact meaning of terms within the contract. For example, the definitions section may define “insured property” as a car, house, or business property, depending on the type of insurance. The final pages of the contract outline the exclusions and conditions, which constitute the majority of the policy.
Insurance contracts typically either list the specific circumstances under which coverage applies (named peril policy) or state that coverage applies to all circumstances except those specifically excluded (all-risk policy). Generally, most auto and property insurance policies sold by companies are all-risk.
Insuranceopedia Explains Insuring Agreement
Insurance contracts include an insuring agreement to specify exactly what is covered, as agreeing to cover all circumstances would be prohibitively expensive. If an insurance company pays out more money than it receives in premiums, it risks bankruptcy. Therefore, insurance companies must carefully determine what to cover and what to exclude.
To maintain transparency and help consumers understand market conditions, most insurance companies disclose their payout rates. For instance, if numerous insurance companies in a particular area have to pay out large claims, they may begin to restrict coverage and raise premiums. This often happens after catastrophic events, such as fires that devastate entire cities. In such cases, insurance companies must recover their losses by tightening coverage, leading to what is known as a “hard market,” where it becomes difficult to obtain affordable coverage. Conversely, a “soft market” occurs when insurance companies are financially stable enough to offer broader coverage options.
To determine what is covered and what is excluded, insurance companies employ actuaries and actuarial consultants. These professionals, who typically undergo 6–10 years of training, use complex mathematical models to calculate the probability of a loss occurring. If the cost to cover a particular loss is high and the likelihood of that loss happening is also high, the insurance company may exclude that coverage. For example, if a coastal neighborhood has a history of earthquakes or floods, actuaries will assess the risk of such events happening again. If the risk is deemed too high, the insurance company may decide not to offer coverage in that area to protect its financial stability.
Once the insuring agreement, definitions, exclusions, and conditions are established, endorsements may be added to the policy. Endorsements are clauses that modify or alter the original terms of the insuring agreement. For example, water damage coverage or an earthquake endorsement could be added to a homeowner’s policy in a coastal area. This endorsement reverses an exclusion in the original contract, providing some coverage. However, the cost of these endorsements may be high, depending on the probability of a loss and the cost of rebuilding. Endorsements also come with their own conditions and exclusions. Because they reverse exclusions and conditions from the original policy, the resulting double-negative language can sometimes be confusing.
Although the insuring agreement is designed to clarify what is covered, disagreements often arise over its terms. These disputes frequently lead to lawsuits in which each party presents its own interpretation of the agreement.
