What part of the insurance contract contains the insurers promise to pay benefits?

What is an Insurance Agreement?

An insurance agreement is a legal contract between an insurance company and an insured party. This contract allows the risk of a significant financial loss or burden to be transferred from the insured to the insurer. In exchange, the insured promises to pay a small, guaranteed payment called a premium.

Insurance can exist for virtually anything in every industry, but we often see insurance agreements for health insurance, life insurance, and auto insurance.

Like any other legally binding contract , for an insurance agreement to be enforceable, it must contain all the essential elements of a contract. These elements include:

• Element #1: Offer and Acceptance: The offer in an insurance agreement is provided by the party wanting insurance by submitting a proposal form. If the insurance company agrees to provide insurance, that is acceptance.
• Element #2: Consideration: Consideration is the exchange of items of value, whether money, services, or goods. In an insurance agreement, the insured pays a premium while the insurer promises a payout in the event of an insurance claim.
• Element #3: Legal Capacity: Both parties must have the legal capacity to enter a legally enforceable contract. Neither party can be under the influence of alcohol or drugs, mentally impaired, or a minor under eighteen.
• Element #4: Legal Purpose: If the agreement entails any illegal activities, it is not valid and will not be legally enforceable.

Click here to read an in-depth definition of insurance agreements.

Key Terms in Insurance Agreements

There are many key terms in insurance agreements that you may not see in other contractual agreements . It is important to be familiar with them and understand the meaning of each term. The kind of insurance agreement you have will determine which of these key terms you may find in your agreement.

These key terms include:

• Claim: An insurance claim is a formal request to the insurer for compensation for a covered event.
• Comprehensive: Comprehensive means that the insurance policy covers everything and exclusions must be defined in the contract.
• Co-Pay: Co-pays are seen in health insurance policies. This is the amount of money the insured must pay out of pocket before the insurance company starts paying. Often, insured parties are required to pay a set co-pay for each visit to a medical professional.
• Declaration Page: The declaration page is part of the insurance agreement that summarizes your coverage. It will detail the limits, premiums, and deductibles of your policy and provide instructions on filing a claim.
• Deductible: A deductible is the portion of the loss that the insured is required to pay.
• Enrollment Period: Enrollment periods are the time frames in which a party can update or change its policy. This is seen often with health insurance policies.
• Liability Coverage: Liability coverage protects the insured party against injuries and damage to other people and property claims.
• Policy: A policy is the written contract that lays out the exact terms agreed upon by the insurer and the insured
• Premium: Premium is the payment that the insured agrees to pay in exchange for the insurance coverage. Premiums can be paid monthly, quarterly, bi-annually, and sometimes annually. When the deductible is higher, the premium will be lower.
• Risk: Risk is the possibility of losses that the insurance company agrees to cover.
• Term Insurance: Term insurance is a phrase that can be found in life insurance policies. If a policy is term insurance, the payout will only happen if the insured's death occurs within a specific time frame or after a specific age.
• Underwriter: The underwriter for an insurance policy identifies the risk to determine if coverage should be provided and how much it will cost.

For more key terms that you may see in your insurance policy, check out this glossary.

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Purpose of Insurance Agreements

The purpose of an insurance agreement is to create a legally binding contract between the insurance company and the insured. Within this agreement, the insured agrees to pay small periodic payments in exchange for a payout from the insurance company if the covered event specified in the agreement occurs.

The events covered by insurance agreements are uncertain. This means that they may not happen at all—for example, a car accident. The insured agrees to pay a premium in exchange for car insurance. If an accident occurs, the insurance company will cover the cost of damages. However, even if an accident never happens, the insured still must pay the premium payments.

Insurance contracts are aleatory contracts because the amount exchanged by the parties is unequal and depend upon future uncertain events. Insurance agreements are also considered unilateral contracts because only the insurance company is making a legally enforceable promise.

For additional information about understanding your insurance contract, check out this article.

Types of Insurance Agreements

Insurance agreements are used in almost every industry, and there are various types of policies that can be purchased by those looking to be insured for unexpected events.

Some of the most common types of insurance agreements include:

• Life Insurance: Life insurance policies come in two policies: term life insurance and whole life insurance. Term life insurance provides coverage at a fixed rate of payments for a limited period. Whole life insurance is permanent life insurance that covers the insured until they die. Life insurance is essential for anyone who supports a family that would not financially survive without them.
• Health Insurance: Medical treatment, especially for severe injuries or diseases, can be costly. Health insurance shifts the burden of paying for this expensive care from the insured to the insurance company. The insured party will often pay a monthly premium along with a co-pay at medical visits in exchange for coverage after a certain amount of out-of-pocket expenses.
• Auto Insurance: Depending on your state, auto insurance is often legally required to operate a motor vehicle. Auto insurance doesn't only cover damage done to a vehicle, but it will also cover medical expenses of people injured in a car accident.
• Homeowners Insurance: Homeowners insurance protects a person's home if it is damaged. Damage can occur from natural disasters, fires, floods, or accidents. Homeowners' insurance also usually covers the items in the house from damage or theft and injuries on the property.
• Renters Insurance: If you rent a property, renters' insurance is important for protecting your belongings. While homeowners' insurance protects the property owner's investment, anything you own on the property will not be covered. Renters insurance protects personal property from theft and damage.
• Umbrella Insurance: Insurance agreements usually have a cap and only cover damages up to a certain amount. If damages surpass the cap, you could be left paying out of pocket. Umbrella insurance covers these costs that are more than other insurance policies.

Other types of available insurance policies can also include:

• Travel insurance
• Pet insurance
• Flood insurance
• Uninsured motorist insurance

The type of insurance policy that you invest in will depend on your specific needs and risks.

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3 Main Parts of an Insurance Policy

The parts of an insurance policy will vary depending on the type of insurance; however, the three main components of an insurance policy are conditions, limitations, and exclusions.

• Conditions: Conditions are the insured's requirements, like the responsibility of paying a premium on time and reporting any losses. If these conditions are not met by the insured, the insurance company has the right to deny the claim.
• Limitations: Limitations refer to the policy limits, like how much the insurance will payout for a particular type of loss.
• Exclusions: Exclusions inform the insured about what is not covered by the policy. The three major types of exclusions are:
  1. Excluded perils or causes of loss: Often, these are defined as damage from floods, earthquakes, or nuclear radiation.
  2. Excluded losses: In an auto policy, for example, normal wear and tear would be an excluded loss.
  3. Excluded property: Personal property like a pet is often excluded from homeowners' policies.

The insured must understand these three parts of their insurance policy so they are not faced with any surprises if an event requires an insurance claim.

There are many other important parts included in insurance agreements. Some other essential elements of an insurance agreement are as follows:

• Declarations: The declaration page identifies the insured, the insurance company, the risks or property covered, limits, deductibles, premium, the policy period, and other important information relating to the agreement.
• Definitions: The definitions clause define terms within the policy so there is no ambiguity and the insured understands all policy elements.
• Insuring Agreement: The insuring agreement is the part of the policy where the insurance company makes express promises to indemnify the insured party.
• Endorsements: Endorsements are additional forms that modify the policy by expanding, revising, or deleting clauses in the policy.
• Riders: Riders, like endorsements, are amendments to the policy. An example of a rider may be the change in the level of benefits in a health insurance policy. Insurance companies are usually required to send the insured party copies of any changes in the policy.

Read this article for more information about the different parts you will find in an insurance agreement.

Getting Help with Insurance Agreements

Do you have questions about insurance agreements and want to speak to an expert? Post a project today on ContractsCounsel and receive bids from insurance lawyers who specialize in insurance agreements.

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