Insured Contract
A type of contract or agreement that is specifically covered under a liability insurance policy, where the insurer agrees to defend and pay claims arising from the contractual obligations. These contracts transfer liability risk from one party to another in a way that insurance will recognize and cover.
Example
“The construction company's general liability policy covers insured contracts, so when they signed the hold harmless agreement with the property owner, their insurance would defend any resulting claims.”
Memory Tip
Think 'Contract with Insurance Backing' - it's a contract where your insurance company has your back if something goes wrong.
Why It Matters
Understanding insured contracts is vital for businesses because it determines which contractual obligations your insurance will cover if you're sued. Without this coverage, you could be personally liable for damages arising from contractual agreements, potentially costing thousands or millions of dollars.
Common Misconception
Many business owners think all contracts are automatically covered by their insurance, but only specific types qualify as 'insured contracts.' Another misconception is that signing any contract with insurance coverage eliminates all risk, when in fact coverage has limits and exclusions.
In Practice
ABC Plumbing signs a service contract with a shopping mall that includes a hold harmless clause, making them liable for any accidents. Their $2 million general liability policy lists this as an insured contract. When a customer slips on water from ABC's repair work and sues for $150,000, the insurance company defends ABC and pays the settlement, minus their $5,000 deductible, because the contract qualified as an insured contract under their policy.
Etymology
Combines 'insured' from Latin 'securus' (secure) with 'contract' from Latin 'contractus' (drawn together), referring to agreements that bring security through insurance coverage.
Common Misspellings
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Related Terms
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See Also
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