What is an insurance contract agreement?

12 minute read Published on Mar 11, 2024 by BrokerLink Communications

What is an insurance contract agreement?

Have you ever wondered how a promise can be made solid, something you can actually hold onto when times get tough? That’s exactly what an insurance contract agreement does. But what makes this agreement stand out? And why does everyone keep talking about it? Dive into our blog as we peel back the layers of this important piece of paper to explore the ins and outs of insurance contracts, why they’re essential, and how they work to give you peace of mind in a world full of surprises.

What are insurance contract agreements?

Imagine you’re lending your favourite toy to a friend, but you’re a bit worried they might accidentally break it. So, you both agree on a plan: if something goes wrong, they’ll fix it or get you a new one. An insurance contract is a bit like that agreement, but instead of toys, it deals with much bigger things like your health, car, house, or even your trip to the Bahamas!

In the simplest terms, an insurance contract agreement is a legally enforceable promise between you and an insurance company. You agree to pay them a little bit regularly, and, in return, they promise to help you out financially if certain mishaps happen, like if you get sick, your car gets damaged in an accident, or a storm decides to redecorate your living room.

What exactly is the agreement in the insurance contract?

As we said above, the agreement in an insurance contract is like a promise between you and the insurance company. But let’s break it down further.

Think of it like a membership fee, you have to pay in order to maintain your coverage. You agree to pay a certain amount of money regularly, which is called a premium. In exchange for your payments, the insurance company promises to help you out financially if certain things happen. For example, if you have home insurance and a tree falls through your roof, the insurance company promises to pay for your home repair fees. Or if you have car insurance and get into an accident, they’ll help cover the repair costs.

However, the insurance company doesn’t just promise to help with anything and everything. When agreeing to the terms of the contract, the agreement will clearly state which situations the insurance company will cover, such as illness, accidents, or damage to your home and which ones they won’t.

So, the insurance agreement is essentially a trade-off: you pay a predictable, manageable amount regularly, and in return, you get financial protection and support when you face specific, unexpected challenges.

What are the essential elements of an insurance contract agreement?

When we talk about insurance contracts, there are four key elements that make them work: the agreement, consideration, legal capacity, and legal purpose. These four elements ensure that an insurance agreement is valid, binding, and enforceable. It’s a bit like making sure all the pieces of a puzzle fit together properly to complete the picture. Without any one of these elements, the contract might not hold up, leaving either the insurance company or the policyholder in a tricky situation.

Agreement (Offer and Acceptance)

This is where the deal starts: You (the intended policyholder) apply for insurance, which is your offer. When the insurance company says: “Yes, we’ll cover you,” and you agree to their terms and start paying premiums, that’s the acceptance. It’s like agreeing to the rules of a game before you start playing.


Consideration is about what each party gives and gets in the deal. You give money (also known as paying premiums) regularly to the insurance company. In return, the insurer promises to help cover costs if certain things happen, like if you get sick or your car gets damaged. It’s like buying a ticket for a ride; you pay, and in exchange, you get to enjoy the ride.

Legal capacity

Everyone involved needs to be legally competent to enter into a contract. This means the person buying the insurance and the company selling it must both have the legal right to make the deal. For example, the person needs to be of a certain age (usually 18 or older, depending on the type of insurance policy) and mentally capable of understanding the agreement. The insurance company or broker needs to be licensed and authorized to sell insurance. It’s like making sure everyone who signs up for a contest is actually eligible to participate.

Legal Purpose

The insurance agreement must be for something legal and not against public policy. Basically, you can’t have an insurance policy for something illegal. The purpose of the insurance must be to provide protection against real risks, like illness, accidents, or damage to property. It’s like saying the game everyone’s agreeing to play has to be a fair one, not something that breaks the rules of fairness or legality.

What are the main sections you’ll find in an insurance contract agreement?

Your insurance contract agreement is like a guidebook that explains the rules and details of your insurance coverage. It’s divided into several main sections, each serving a specific purpose to make everything clear and organized. Here’s a breakdown of these sections:

Declarations page

This part is like the identification page of your agreement. It lists your name, what’s being insured ( your car, vacation or house), the policy number, coverage dates, and how much coverage you have. It’s a quick snapshot of the important details.

Insuring agreement

Here, the insurance company explains exactly what they promise to cover. This section outlines the types of risks and damages the insurance will pay for, like accidents, theft, or fire damage, and under what conditions.


Just as important as knowing what’s covered is knowing what’s not. This section lists the situations or items the insurance won’t cover, like certain types of damage or risks.


These are the rules you and the insurance company agree to follow. It includes how to file a claim, what to do to keep your coverage, and how to renew or cancel your policy. It’s like the instruction manual for how the policy works.


Sometimes, you or the insurance company might want to add to or change the agreement. Endorsements are those changes or extra pieces of coverage that get added to the standard policy. For example, if you decided to add collision coverage or accident forgiveness coverage to your car insurance policy, you’d find them here. Endorsements or add-ons customize your policy to fit your specific needs.

Policy limits and deductibles

This section explains the maximum amount the insurance company will pay for different types of claims and any deductibles, the amount you have to pay out of pocket before the insurance kicks in.


It details how much you need to pay for your insurance, how often, and what happens if you miss a payment.

How does an insurance contract agreement work?

An insurance agreement is like a safety plan that helps cover costs when unexpected things happen, but only under certain conditions. Here’s a step-by-step breakdown of how it works:

Choosing a policy

First, you choose what you want insurance for—this could be for your car, home, life, health, or even a trip you’re planning. Each type of insurance covers different things, so you pick the one that matches your needs.

Agreeing on terms

You and the insurance company agree on the details of the coverage, including:

  • How much you pay regularly for the coverage (premium payments)
  • How much your deductible will be (the amount you pay yourself before the insurance starts paying)
  • What your coverage limit will be (the maximum amount the insurance company will pay for a claim)
  • What is and is not covered by the policy

Paying premiums

You pay the insurance company like you agreed—it could be every month, every few months, or once a year. This keeps your insurance active.

Making a claim

If the situation you’re insured against happens, like you get sick, your car gets damaged in an accident, or your house needs repairs due to a covered reason, you file an insurance claim with the insurance company. You will likely need to give them details and proof, like medical or repair bills. If you have multiple insurance contracts for the same thing, you will need to submit a separate claim to each insurer and notify each insurance company of all policy contracts.


The insurer evaluates your claim to make sure it falls within your policy’s coverage. They’ll look into what happened, verify the costs involved, and ensure everything matches your agreement's terms.

Payout or denial

If the insurance company approves your claim, they will pay out to cover the costs, either directly to you or to the service provider, such as a doctor or mechanic), according to your policy’s terms. If your claim doesn’t meet the policy terms, it might be denied, and they’ll explain why.

What’s the difference between an insurance policy and an insurance contract?

The terms “insurance policy” and “insurance contract” often get used interchangeably. A common way insurers and policyholders help differentiate them is to think of the policy as a detailed plan of what insurance covers, how it works, and what the rules are. The contract, meanwhile, is the formal agreement that puts that policy into action.

While “contract” emphasizes the legal and binding nature of the agreement, “policy” focuses more on the specifics of the coverage itself. When you buy insurance, you agree to the terms of the policy, and that agreement becomes your insurance contract.

What is an indemnity insurance contract?

Most insurance contracts fall under indemnity contracts. An indemnity insurance agreement is a type of insurance that’s designed to protect you financially by covering losses or damages up to a certain amount. Think of it like a safety net that catches you if you fall, but only up to how big the net is.

Indemnity insurance helps you feel safer knowing that if something goes wrong, you won’t be left to handle the financial impact all on your own. It’s like having a backup plan to help you recover from losses without dipping into your own savings too much. This type of insurance is common for property, vehicles, and liability coverage, helping individuals and businesses to stay stable when accidents or mistakes happen.

Examples of common indemnity insurance contracts

Key things to remember

  • Indemnity insurance doesn’t allow for profit from a claim; it just compensates you for your actual loss.
  • You’ll need to show how much you’ve lost financially, which means providing receipts, valuations, or repair quotes.
  • There’s always a limit to how much the insurance company will pay, which is decided when you buy the insurance.

What is a non-indemnity insurance contract?

A non-indemnity insurance agreement is a type of insurance where the payout isn’t based on the actual financial loss you’ve experienced but rather on a predetermined amount agreed upon in the contract. This is different from indemnity insurance, where you’re compensated based on the value of what you’ve lost.

Non-indemnity insurance offers peace of mind in a different way. It provides a guaranteed payout in certain situations, which can be especially helpful for planning and financial stability. For example, if someone has a life insurance policy, their family knows they’ll receive a specific amount of money if the policyholder passes away, which can be crucial for covering living expenses, debts, or funeral costs, regardless of other financial aspects.

Examples of common non-indemnity insurance contracts

  • Life insurance
  • Critical illness insurance
  • Personal accident insurance
  • Disability insurance (short and long-term)

Key things to remember

  • The payout is fixed based on the agreement, not on the actual loss or damage cost.
  • It’s often easier and quicker to make a claim because you don’t have to calculate the value of the loss.
  • This setup is common in life insurance policies and certain types of health insurance, where the focus is on providing a predetermined benefit rather than covering specific financial losses.

Can I cancel my insurance contract agreement?

Yes, you can cancel your insurance contract, but how you go about it and what happens after depends on the rules of your insurance policy and what the company says. Cancelling your insurance absolutely is something you can do, but you need to follow the steps carefully to avoid any hiccups and be prepared for possible fees if you’re planning to cancel before the end of your policy period.

Read over your policy agreement

First up, you need to take a close look at your policy to figure out the right way to cancel it. This part tells you how to let the insurance company know you want to cancel, what you need to say, and if there’s a deadline.

Contact your insurance company

Next, get in touch with your insurance company to let them know you’re cancelling. They might ask you to send a written note or an email to make it official. Also, be aware that there might be a fee for cancelling early, and if you’ve paid for your insurance ahead of time, you might get some money back for the time you won’t be using the insurance.

Timing and confirmation

When you’re picking a day to end your insurance, you can usually pick right away or choose a date in the future. This is important if you’re planning to switch to another insurance to make sure you don’t end up without any insurance at all for a while. For example, if your insurance is the kind that you have to have by law (like auto insurance), make sure you have another auto insurance policy ready to go so you don’t get in trouble for not having coverage. After everything’s done, make sure the insurance company sends you a note that says your insurance is definitely cancelled.

What happens if I break my insurance contract agreement?

Breaking the agreement could mean not paying your premiums on time, not following the terms outlined in your policy, or providing false information. If you break your insurance contract agreement, several things can happen, depending on how you broke the agreement:

Your coverage might be cancelled

If you don’t pay your premiums, the insurance company can cancel your policy. This means you won’t have insurance coverage anymore. If something happens, like an accident or a health issue, you won’t be able to claim money from your insurance since the coverage has stopped.

You could owe money

If you cancel your policy or stop paying premiums but have already made claims or received benefits, the insurance company might ask you to pay back some of the money. Also, if there are cancellation fees or other charges outlined in your contract, you might have to pay those.

It might be harder to get insurance later

Breaking an insurance contract can make it tougher to get insurance later on. Insurance companies keep records, and if they see you’ve had a policy cancelled before, they might think you’re a risky person to insure. This could mean higher premiums in the future or difficulty finding a company willing to insure you.

You could face legal consequences

If you provided false information or committed fraud, the consequences could be more serious, including legal action. For instance, if you lie about something important on your insurance application or when making a claim, the insurance company might not only cancel your policy but could also take you to court.

You may not have coverage when you need it

The most immediate impact of breaking your insurance contract is that you might not have coverage when you need it most. Whether it’s a car accident, a health issue, or damage to your home, without insurance, you’d have to pay all the costs yourself, which could be very expensive.


An insurance contract agreement is like a safety net that’s there to catch you when unexpected things happen, but it comes with its own set of rules. It’s a legally enforceable promise between you and the insurance company where you agree to pay a little bit over time, and in return, they promise to help cover high costs if something bad happens, like an accident or a health problem.

In a world full of surprises, having an insurance contract agreement is a smart move to protect yourself and your finances. Just like any important contract, understanding the fine print and staying true to your commitments ensures that this safety net will be there to support you when life throws a curveball your way.