Insuring Agreements Primer
The insuring agreement is the most important part of an insurance policy because it controls what is covered. A standard insuring agreement, at its most basic, states something like, "We will pay for loss or damage to the property , but the loss or damage must be caused by a covered loss." It then proceeds to describe the perils that are covered or not covered in the exclusions sections of the policy.
An insurance policy is a contract, and as with any contract, the terms dictate the rights and responsibilities of the insurer and the insured. The insuring agreement is the part of the contract that tells you what is covered by the policy.
Insuring Agreements Major Components
The insuring agreement contains the scope of coverage; the considerations that the applicant must satisfy in order for coverage to apply; and the conditions for a covered loss to be paid.
Coverage scope. The insuring agreement provides certain coverage against which the insurer will defend and indemnify. The language used in the contract will be important to review as the court will actually interpret this language as it is written on its face.
Policyholder’s considerations. A consideration is the value given in exchange for the contractual responsibility of another. The insurer exchanges a promise to pay claims in exchange for the policyholder’s performance—for example, the premium paid. Insurers often refer to certain parts of the policy as "insuring agreements" (i.e., the personal injury liability agreement), but usually the term "insuring agreement" refers to the basic promises to provide coverage already mentioned.
Conditions of coverage. In general, the insurance policy establishes what is expected of the insured as a condition of coverage. The insuring agreement sets forth the specific conditions which must be satisfied by the insured in order for coverage to apply.
Typically, the insuring agreement will not provide the specifics of what must be done for the coverage to be afforded. Some conditions are automatically provided by statute, regulation, or are based on the common law. An example of an insured’s duty under the law is an insured’s duty to cooperate with its insurer. Some conditions are optional and are the result of the insurer’s negotiation with the insured. An example of a condition that is negotiated is the deductible clause, which is an agreement that the insured will bear a portion of the loss.
Coverage Terms and Endorsements
Coverage details and exclusions are typically found in the insuring agreement or within the main body of the policy. The insuring agreement is the section of the policy that describes what an insurer is promising to provide, how coverage may be triggered, and the scope of that coverage. Combining coverage parts and exclusions within the insuring agreement saves space for other things, but it also makes it difficult to discern the scope of coverage as well as the limitations.
Many insurance policies have incorporated standard version insuring agreement forms that provide certain standard terms. But many other policies have created their own insuring agreement forms or have adjusted the standard ones. As a result, although there are many standard versions of insuring agreement forms, it is very common for a policy to have an insuring agreement that is not a standard version. Understanding the interplay between coverage and exclusions, therefore, is essential when reading an insuring agreement.
Exclusions are exceptions to coverage and are also typically found within the insuring agreement itself. Some exclusions are fairly standard, such as prior notice, notice of circumstances that may give rise to claims, as well as fraud and dishonest acts. Some policies preclude coverage for claims arising from the rendering or failure to render professional services or for claims that are based on or arise out of specific conduct. Standard exclusions usually must be read in harmony with the rest of the policy; whereas, the variance in some exclusionary language makes them fit neatly within the requirements of regular exclusions. The insureds should attach great importance to the language used in the exclusions because the wording of exclusions is often the difference between coverage and no coverage.
Legal Aspects of Insuring Agreements
The legal implications of these clauses in insuring agreements are significant and grave.
Whether or not notice is required and how much notice is required can be the difference between a claim being paid by the insurance company and a total loss for the insured.
Irrespective of whether or not notice is required under the contract, triggering the coverage for the claim or lawsuit may also get complicated. The likely result will be pressure for the policyholder to admit liability or be subject to possibly nondischargeable liability , and the insured may be compromised by a delay of notice, including when faced with the issue of coverage for punitive damages is defaulted.
What is needed is a careful examination of exactly what is required to trigger the coverage, how the insuring agreement forces the policyholder to respond to a third-party claim. Understanding exactly what is being agreed to at the time of purchase or modification of the insurance policy could make a substantial difference in the legal rights of the parties later on.
Drafting Insuring Agreements
The insuring agreement is not set in stone. It is not even holographic. The insuring agreement may be altered based upon the particular needs of the policyholder, along with the unique obligations the policyholder undertakes based upon its own particular situation. For example, the particular industry may demand that a particular form of coverage be provided, that is not customarily offered. The insured may desire, for example, to modify an insuring agreement to provide defense costs at the limits of liability, to eliminate however it might be worded the limiting words "all" or "sole", or to replace culpable "wrongful acts" with "intentional acts." In the same vein, the insured may attempt to erase how a breach of warranty or co-insurance clause operates, or attempt to insert other defenses more to the liking of that policyholder.
The insurer also can alter the insuring agreement to suit its needs. The insurer may wish to modify the jury-pandering words "all risk" or "all loss." It may desire to shorten the statute of limitations provision, or limit the insurable event to non-accidents, or otherwise eliminate certain classes of loss, such as those occurring from educational malpractice. Insurer-prepared forms also attempt to narrow the definition of "employee" to exclude those individuals who might be billed to the policyholder, while adding definitions of labor unions or "affiliates" designed to scare most policyholders away. These attempts at narrowing coverage within the insuring agreement must be viewed in light of not only the common sense of the policyholder reading the provision as providing unlimited coverage, but also in light of statutory requirements or what the law may say about that type of conduct of insurers.
A well-designed insurance product is one that takes into account the need for coverage and the desire for affordable premiums. The one that attempts to promote one over the other (especially without regard to what the marketplace says) eventually is the non-viable product. In the end, the marketplace will make the insurance product viable by not purchasing an unsatisfactory insurance product.
How to Read and Interpret Insuring Agreements
When reading the insuring agreement of the policy, it is important to look for certain specific language, or to know where to find certain statements, that are typically included in each insuring agreement.
As a preliminary matter, the insuring agreement will clarify what "your" means in the General Conditions of the agreement (e.g., "the Insured or anyone else having an interest in your property). What exactly defines "your" will be dependent upon the language of the insuring agreement. The insuring agreement will also define who qualifies as a "Named Insured," as well as define the parties to the agreement (e.g., insured entity named on the dec page, additional insured, certificate holder, etc.). The definition of "Insured Property" should also be cited and located in the insuring agreement.
A good starting point for interpreting the insuring agreement of the policy is to refer to the General Conditions of the policy. The General Conditions of the policy will afford clarity regarding what specific language is being used by the insurer and insured. For example, "limited as the definition of limits", or "defined as," or other similar terms are commonly noted to define the limits of the policy in the general conditions of the policy. In addition to looking to the General Condition section of the insuring agreement, reference should be made to the Declarations, if available, as well as any endorsements, forms, and schedules that apply to the contract. If foreseeable or common events are not covered in the insuring agreement or via an endorsement, one may have to rely on the specific language of the policy to determine the type of coverage or exclusion being offered .
Unforeseen or unpredictable events must be evaluated on a case by case basis to determine whether a particular event is triggered. Claims are best interpreted and evaluated through a framework that emphasizes fairness and clarity. Where it is not clear what the policy is offering, or what the policy is excluding, the claim should be paid in the name of fairness, if there is no other recourse. Courts have noted that obvious discrepancies between intent and actuality should not stand in the way of fairness because the policyholder has a right to expect reasonable protection for a loss (see State Department of Highways v. Md. Lumbermen’s Mut. Fire Ins. Co., 598 P.2d 235 (Utah 1979) and Annis v. Northern Pacific Ins. Co., 659 P.2d 307 (Idaho 1983)).
After determining the definitions of the keywords (such as "your," "Insured Property," and "Named Insured") in the insuring agreement, and interpreting the policy based on the regular and commonly-used meanings of the actual words used in the policy (i.e., dictionary meanings), coverage can be evaluated based on the language. (Any terms that are not defined in the policy or via an endorsement should be interpreted according to their dictionary meanings). Only if the insured is not covered should the exclusions-which are usually found in a separate section known as the General Exclusions in the insuring agreement-be evaluated. Exclusions would be evaluated in situations where the "Insured Property" is not covered, or the damages are not covered, or the coverage is otherwise excluded in the insuring agreement.
It is advisable to file all relevant documents from the insuring agreement into an electronic or hard file so that the information can be easily accessed and utilized throughout the course of the claim.