Acceptability of insurers: Overview, definition and example
What is acceptability of insurers?
Acceptability of insurers refers to the criteria that an insurance provider must meet to be considered reliable and financially stable for issuing coverage under a contract. This ensures that policies are backed by reputable insurers capable of fulfilling claims obligations. These criteria may include financial strength ratings, regulatory compliance, and experience in the relevant insurance sector.
For example, a construction contract may require the contractor to obtain liability insurance only from insurers rated A- or higher by AM Best, ensuring the insurer is financially strong and capable of paying claims if necessary.
Why is acceptability of insurers important?
The acceptability of insurers is important because it protects businesses and policyholders from financial risks associated with unreliable or undercapitalized insurance companies. If an insurer lacks financial strength and fails to pay claims, the insured party may face unexpected liabilities or financial losses.
For businesses, specifying acceptability criteria ensures that contractual insurance requirements are met by insurers with proven track records. Many industries, including construction, finance, and real estate, require minimum insurer ratings to mitigate risks in high-value transactions.
Understanding acceptability of insurers through an example
Imagine a commercial landlord requires tenants to carry property insurance as part of their lease agreements. To ensure proper coverage, the lease specifies that the insurance policy must be issued by an insurer rated at least “A” by Standard & Poor’s or Moody’s. If a tenant provides coverage from an insurer that does not meet this rating, the landlord may reject the policy.
In another example, a logistics company signs a contract with a shipping provider that must carry cargo insurance. The agreement states that only insurers licensed to operate in the country and rated "A-" or better by AM Best are acceptable. This requirement ensures that, in the event of a loss, the insurance company has the financial strength to pay claims.
An example of an acceptability of insurers clause
Here’s how an acceptability of insurers clause might appear in a contract:
“All insurance policies required under this Agreement shall be issued by insurers licensed to operate in the applicable jurisdiction and rated at least [Insert Minimum Rating] by [Insert Rating Agency] (e.g., AM Best, Standard & Poor’s, or Moody’s). The Insured shall provide evidence of compliance with this requirement upon request.”
Conclusion
Defining the acceptability of insurers in contracts ensures that insurance policies are issued by financially stable and reputable providers. This protects businesses and insured parties from potential losses due to insurer insolvency or non-compliance. By specifying minimum insurer ratings and licensing requirements, contracts can ensure that all insurance obligations are backed by trustworthy insurers, reducing financial and operational risks.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.