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What Is an Insured Contract?

By Osmand Vitez
Updated May 17, 2024
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An insured contract allows for a specific limitation in a contractual liability coverage agreement. With liability coverage, an individual most often receives payments when a specific event triggers the insurance clause. An insured contract — which most often applies to terms in lease, easement, or business agreements — carries limits to the amount paid on a certain insurance clause. The limitations from this contract may not be entirely specified in the original contract. Once the event triggers the insurance clause, the case may go under review where the insurance company reviews the case and places limits on the payout.

A basic review of insurance contracts is that one party thinks something will not happen when another party thinks that something will. For example, a business owner may believe there is a possibility that someone will rob his or her company. Therefore, the business owner is willing to pay an insurance company a certain amount each month that will lead to a large payout if such a robbery takes place. The insurance company, however, probably believes that the business owner’s company will not be robbed or vandalized at any point in time. The insurance company then sells a policy that brings in money in hopes that no future payout will occur.

Based on the example above, it can be easy to see why an insurance company may engage in an insured contract. Without these limits, an insurance company may be paying out large sums of money on each insurance contract or policy. Even small events can trigger large payouts based on the conditions surrounding the event that may trigger the specific insurance clause. Insurance contracts — and any related insured contracts — can have numerous clauses, limits, and other conditions specified. Each clause has a specific purpose that relates to different liabilities that may occur during the life of the insurance policy or insured contract.

A common agreement in a contractual obligation or insured contract may be a hold harmless agreement, which indemnifies another party. Though indemnity itself is not insurance, it attempts to answer a liability for another person. In short, one party in the contract holds the other harmless so that the other party will receive payment as defined in the contractual agreement. This is a technical process that can result in many types of clauses inserted into agreements. These clauses can be quite restrictive and result in low or no payouts for certain actions.

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