What is an Insuring Agreement?
An insuring agreement is the basic promise of an insurer to its insured about the scope of coverage under a policy. Wherever located in an insurance policy, it is the essence of the policy — always subject to all conditions, terms, and definitions of the policy. The insuring agreement is the part of a policy that guarantees protection for the subject matter covered . For example, a typical insuring agreement in a commercial general liability policy promises to pay loss for covered bodily injury caused by an occurrence. An insuring agreement also is known as the coverage grant. The coverage terms are set forth in the insuring agreement, which gives meaning to the agreement and cannot be interpreted as given its scope, terms, and meaning.
Components of the Insuring Agreement
A key purpose of the insuring agreement is to state what coverage is provided by a policy. To form an agreement, the consideration must be mutual so that there is a two-way street of rights and responsibilities by the insurer to the insured. The consideration to the insurer is the premium paid and/or the assumption of risk by the insurer; the consideration to the insured is the promise that the insurer will pay if certain conditions are met. Insuring agreements also generally contain other essential terms, such as the duration of the coverage, exclusions, and conditions.
Duration of Coverage
The duration of coverage generally sets forth how long coverage will last before it expires or must be renewed. Many policies have an auto-renewal provision recognizing the insurer’s right to renew upon payment of the renewal premium. If the renewal premium is not timely paid, the policy will lapse and an insured will no longer be covered under the policy.
Exclusions
Exclusions are intended to eliminate coverage for certain risks, or otherwise impose certain obligations. Knowing the exclusions will be critical to policy interpretation should a claim arise. For example, in a commercial general liability policy, pollution exclusions generally exclude coverage for bodily injury and property damage "arising out of" or "in any way related to" pollution. A careful reading of the entire exclusionary clause is necessary to determine its scope and application. A pollution exclusion may apply to liability for clean-up costs but does not bar coverage for bodily injury.
Conditions
Conditions essentially temper the insuring agreement, and provide the insurer with certain rights that must be followed before the insurer is legally bound to provide coverage. Depending on the language contained in the condition, failure to follow the condition may vitiate the entire contract or merely suspend the insurer’s obligations until the condition is satisfied. Conditions may also affect the rights and obligations of the insured. In a workers’ compensation policy, for example, the condition that an employee provide notice of a work-related injury within a specified time period is a condition precedent to coverage. Some conditions, however, may be found to be prejudicial to the insured, such as when the condition is conditions precedent to payment of benefits. In that case, courts in some jurisdictions may find that a violation of the condition would not preclude coverage when the conduct bears no substantial relation to the risk.
Major Types of Insuring Agreements
Insuring Agreements are phrases typically included within a coverage part of a policy which clarify when coverage is afforded to an insured. There are several common types of insuring agreements which can be found in various types of policies. The two most common types of coverage are occurrence-based and claims-made-based. An occurrence-based policy provides coverage for losses occurring during the policy period. Generally, no claim needs to be reported within the policy period. If a claim is made after the policy period, and the loss occurred within the policy period, the claim may still be covered because the insured was not forbidden from reporting claims after the policy period ended. If a claim is not reported, but the loss occurred during the policy period, it is presumed to be covered. Because there is no line of demarcation regarding when a claim may be reported, courts have generally construed occurrence-based coverage liberally in favor of coverage. Conversely, a claims-made policy provides coverage for claims made during the policy period and if the claim involves prior acts, those prior acts must have occurred after the retroactive date set forth by the policy. The retroactive date is usually the inception date of the policy or sometimes a point in time prior to inception of the first policy in the series of consecutive policies issued. Unlike occurrence-based policies, claims-made policies typically require the insured to report claims made against the insured during the policy period, regardless of when the loss occurred. Because of the requirement to report during the policy period, courts have strictly construed claims-made policies in favor of the insurer where the insured fails to provide timely notice.
Typical Exclusions in Insuring Agreements
Most insuring agreements contain exclusions that limit the extent of the insurance provided. Typical exclusions reduce the scope of the "promise" made by the insurer and narrow the risk covered by the policy.
A large number of exclusions are found in most property policies: Loss due to War; Nuclear Hazard (including radioactive contamination or caused by the pressure waves of a nuclear explosion); seismological activities, volcanic activity, or Lost in the Bermuda Triangle (this is a perennial favorite of some counsel) or from damage to real property caused by contact with vehicular objects; losses due to flood or earth movement (unless specifically covered in the policy); loss or damage caused by "mysterious disappearance" (i.e., theft in which intent or other evidence is not found). Included in the cause of loss excluded from coverage by all risk property policies is damage to property caused by internal malfunction or breakdown of the insureds own property (failure of the "process of manufacturing."). Other policy exclusions involve loss due to bacteria or fungi; and finally, perhaps the most difficult issue for a policyholder to prove (and in effect "proving a negative") is that the damage is not due to wear and tear.
Liability policies have built-in exclusions, which eliminate liability for punitive and other exemplary damages in many states. Exclusions for intentional acts may also apply to injuries which result from willful acts or intentional misconduct on the part of the insured or done by the insured with the knowledge that such acts would constitute a crime or constitute a violation of the rights of another.
How to Read Insuring Agreements
As for construction of an insuring agreement, courts are not bound to a literal interpretation of all policy provisions. However, courts have consistently held that the duty to defend is measured by "some potential or possible coverage" in the complaint. In determining whether an insurer has a duty to defend, a court will look at the insuring agreement to determine its scope. Unless otherwise defined, the insurance policy terms are given their ordinary meaning under the circumstances. The language is not construed in a manner that will extend coverage where not intended. The court will interpret a policy in the context of the policy as a whole and the construction should harmonize all of the policy’s provisions. An insured that seeks coverage under an insurance policy must "prove that the claim asserted against it is within the policy’s coverage." An insurer cannot escape its responsibility to defend a suit merely because it might not be liable for all of the damages asserted in the suit. In some circumstances , a policy covering liability from a specific conduct without reference to a particular form of a loss might provide coverage for such loss. Resolving an ambiguity in favor of the insured is not a duty to provide coverage; it is a duty to provide a defense for a suit that seeks relief that is potentially within the scope of coverage. An insurer satisfied by allegations in a complaint that a suit was outside the policy’s scope of coverage is not required to seek the dismissal of the complaint. In construing an insurance contract, a contract of insurance should not be voided for the presence of one ambiguous term if an otherwise adequate basis for asserting coverage exists. A general exclusion in a policy does not preclude coverage for a claim not subject to the exclusion. An insurer seeking to escape liability under its policy bears the burden of showing that policy language unambiguously excludes coverage. Courts will construe an insurance policy according to its plain meaning, without resort to construction that would render any portion of the policy superfluous. When equitable distribution among insureds is required, resulting from a proper construction of the insuring agreement, an insurer bears the burden of advising the competing interests of coverage.
Negotiating the Insuring Agreement
When negotiating the insurance policy, an insured can and should negotiate the insuring agreement. This is the part of the policy that sets forth what the carrier promises to pay for what conduct. Sometimes the policy will fail to define the insuring agreement or will create insuring agreements that are ambiguous or give the impression of coverage but that may not actually provide much, if any, coverage. The insured should not just sign up for whatever the broker proposes or the carrier will offer. If the employer desires a broad "all-claims-made" insuring agreement, then the insurer can be asked to add the words "all claims" to the insuring agreement. In our example of the $1,000,000 insuring agreement above, it would state "The insurer shall pay the insured on his behalf loss from a claim first made against the insured during the policy period reported in writing to the insurer during the policy period arising out of any wrongful act, as defined herein, committed or allegedly committed on or after 1/1/2000 and prior to 1/1/2001."
However, it is not enough to just ask that the words "all claims" be added to the policy. The employer should first read the entire policy and review coverage with its coverage counsel. Particularly, it should consider how other policies compare, what losses the employer can expect to incur, and whether they are inadequate. The employer should then be clear with the broker and/or insurer what type of coverage it is looking for. The employer should also discuss the coverage with its coverage counsel and devise a proposal that clarifies any ambiguities or questions and addresses the actual needs of the employer.
If the policy is vague or difficult to interpret, then the employer should consider adding a policy endorsement that carves out specific types of coverage or that states how the policy is to be interpreted. The employer should require that the carrier change any ambiguous language in the policy or on an endorsement to provide clearer coverage. If the insured is unclear as to whether particular conduct is covered under the insuring agreement, then it should seek to narrow the insuring agreement so as to leave that conduct within a gray area. This will have the effect of making it more difficult for the carrier to say that the conduct is not covered.
Insureds should try to negotiate a broadened insuring agreement, such as one that covers passive liability for acts in which the insured was not even involved; or that covers conduct in which there was no "bad faith." Insureds should also attempt to negotiate the exclusions in the policy if the exclusions are too broad and could apply to normal course business operations.
It is very important to discuss the policy terms in advance with coverage counsel. The insured should also be clear and accurate with the broker or the carrier about what it wants and why it wants it.
Insuring Agreements in Action: Case Law
To understand how insuring agreement work in practice, let’s consider a few real-life examples.
Case 1: In Atain Specialty Ins. Co. v. Nammo Talley, Inc., 123 F. Supp. 3d 743, 757 (W.D. Ark. 2014), the insured, an airplane manufacturer, had simultaneous all-risk and fire insurance policies, and filed a claim with both insurers when it was sued in California on a product liability claim. The insured sought a declaration that both policies provided coverage because one of the policies had a $1 million limit of liability per occurrence, and the other had a $2 million limit. The underlying lawsuit was eventually resolved for $2 million, with $1 million paid by Atain and $1 million paid by Nautilus. Nautilus, the policy issued by the company that paid first, was not liable for additional coverage above the $1 million, because the Atain policy "did not claim to provide any coverage beyond that provided by the ‘underlying insurance’ policies listed in the policy." It provided an all-risk of physical loss policy, but "the insuring clause identifies the ‘Underlying Policies’ as the insurance policies that will respond to a claim, and does not reference the policy itself." Therefore, the only primary insurance policy was the Nautilus policy, and it paid first, with the Atain policy providing excess coverage.
Case 2: In Liberty Mut. Ins. Co. v. Allen & Assocs., 117 F. Supp. 3d 850 (N.D. Ill. 2015), the insured entered into an agreement with two other companies to solicit business for each other. The agreement specified, among other things, that the parties would maintain insurance for the duration of the agreement for certain types of risks. Each party carried its own general liability insurance policy from Liberty Mutual. Liberty Mutual denied coverage for a lawsuit under the policies, and the insured sued. The court found that property damage was "undoubtedly" involved, because it was a "business organization corporation," which "would have to suffer diminished revenue or some other detriment to have to compensate Allen and Associates – a covered loss to Liberty Mutual." The court found that the mutual contractual obligation to share revenue from new contracts constituted "property damage" because potential new customers were "intangible property" that had "lost value because of the alleged breach of contract." Therefore, the court concluded, "as a matter of law, income is property, and the loss to it would be property damage under the insured’s policy with Liberty Mutual."
Case 3: In First Bank v. United Pac. Ins. Co., 213 Cal. App. 3d 1051, 1060 (1998), the insured financed numerous loans in order to purchase stock in other companies at discounted rates, and then sold the companies for profit. After selling one of the companies, the insured learned that the value of the stock would be reduced because the seller had fabricated certain documents in the transaction. The insured notified its insurer, which denied coverage for the claim, and the insured thereafter brought a declaratory judgment action. The insurer contended that the insured’s loss "was not a ‘loss’ as covered by its policy." The insurer argued that the claim was for loss of investment and not a loss of money and tangible assets. On appeal, the court agreed with the insured, finding that the insured suffered injury even though it "can calculate the exact amount of damages it lost, based on the value of the fake stock certificates."
Unlike standard insurance policies, insuring agreements must be carefully worded to avoid unintended exclusions of coverage. Insuring agreements generally identify the type of risk that is covered. When two or more policies cover the same loss, ambiguities are often found in determining whether the risk falls inside or outside the insuring agreement, resulting in additional litigation.
The Future of Insuring Agreements
In consideration of the evolving nature of the insurance industry, as innovators and new technologies come onto the scene continually, it is important to look to potential future trends that may affect insuring agreements. The consolidation and increased regulation in the insurance and re-insurance industries, along with the volatile nature of the economy leading to a changing insurance market, may impact the way insuring agreements are approached by underwriters and insured . It is possible that one trend may be greater scrutiny placed on insuring agreements and how ambiguities are determined. The other possibility is that insurers may become less risk-averse and underwriters may be less likely to assume the entire exposure creating a reduction in coverage and an increase in sharing exposure among multiple insurance and re-insurance companies. Insurers will need to be vigilant regarding the specific language of their insuring agreements in order to provide the greatest clarity and avoid increased litigation in the future.