What Does Insuring Agreement Mean?
An insuring agreement is the section of an insurance contract in which the insurance company specifies exactly which circumstances it will provide insurance coverage for in exchange for premium payments.
For example, in an auto insurance contract, the insurance 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 specified in the contract. In later pages of the insuring agreement, it will detail exactly what sections A, B and C cover.
Every insurance policy has five parts:
- Insuring agreements.
The declaration pages list important information such as the name of the insurance company, the name of the insured and property/vehicle information. The insuring agreement states which of the subsequent items and circumstances the insurance company will cover in exchange for a premium. Definitions specify exactly what is covered in the contract. For example, the definitions section may define “insured property” as a car, house or business property depending on the type of insurance contract. The end pages of the contract list the exclusions and conditions. These exclusions and conditions constitute the majority of the contract’s pages.
Insurance contracts either list the specific circumstances coverage will apply to (named peril policy) or state that it covers all circumstances except the exclusions (all-risk policy). In general, most policies sold by insurance companies for auto and property are all-risk.
Insuranceopedia Explains Insuring Agreement
Insurance contracts contain an insuring agreement to specify exactly what is covered, because agreeing to cover all circumstances would be costly. If an insurance company is paying out more money than it is taking in, the company may bankrupt itself. Therefore, companies must be cautious about what they do and do not cover.
Most insurance companies list their rate of payouts for the sake of transparency and so consumers understand the state of the market. For example, if many insurance companies in the area have to pay out a lot in claims, they may start restricting coverages and increasing insurance premiums. This may occur after catastrophic loss in certain areas — such as fires that wipe out whole cities. To recoup the loss, the insurance companies must tighten coverages, causing what is referred to as a “hard market,” where it is difficult to get inexpensive coverage. The alternative is a “soft market,” where companies have the financial ability to include many coverages in the insuring agreement.
To decide what is and is not covered, insurance companies employ actuaries and actuarial consultants who calculate the probability of a loss occurring. These professionals are highly trained (usually for 6–10 years) and use complex mathematical equations to determine the probability that the insurance company would have to make a payout for a loss. If the cost to cover a certain loss is high and the probability of the loss occurring is high, the policy may not cover it. For example, some coastal neighborhoods may have a historical pattern of earthquakes or floods. The actuaries will calculate the risk of that happening again, and if it is too high, the insurance company will decline coverage for that entire area in order to preserve their financial health.
After the insuring agreement and the definitions, exclusions and conditions are determined, endorsements may be added to the policy. Endorsements are clauses that change or modify the original wording in the insuring agreement. For example, water damage coverage and an earthquake endorsement may be added to that house on the coastline through an endorsement. This endorsement reverses the exclusion on the original contract and provides some coverage. However, the endorsement may be costly depending on the probability of the loss happening and the cost to rebuild the home after the loss. Endorsements also have conditions and exclusions. Because endorsements reverse exclusions and conditions, the double-negative language may become difficult to understand.
Although the insuring agreement section is designed to clear up what is covered, disagreements still arise about the terms of the insuring agreement. These often result in lawsuits in which each party puts forth competing interpretations of the insuring agreement.