DEFINITION of 'Honorable Undertaking'

A reinsurance treaty clause indicating that the agreement should not be voided by an overly narrow or strict interpretation of the agreement’s language. The honorable undertaking clause, also called the honorable engagement clause, guides the parties to the contract as well as courts and arbitrators in how the contract should be interpreted. The clause is most commonly associated with older reinsurance contracts.

BREAKING DOWN 'Honorable Undertaking'

Reinsurance contracts can be complex legal documents, filled with rules that define how each party is to fulfill its obligations. If a disagreement over the contract occurs, it is often up to the courts to determine the intent of each of the parties at the time the contract was written, and this interpretation will ultimately determine whether one party is legally obligated to pay the other. In order to reduce the potential for a litigious relationship between contract parties, contracts may include an honorable undertaking clause.

Honorable undertaking clauses encourage an open dialogue between the two parties in a contract. They formalize a sort of “gentlemen’s agreement” between parties, and indicate that all parties should act with integrity and good will when dealing with each other. For example, the clause may indicate that unintentional errors or oversights should be corrected as soon as they are discovered. Rather than immediately initiating a lawsuit after discovering the error, both parties are considered to be restored to their original position in the contract provided that the errors are promptly corrected.

This type of clause is also used to provide guidance to courts and arbitrators who may one day have to make a decision based on the language of a contract. For example, the clause may instruct any party reviewing the contract to consider the customs and practices of the insurance industry when making a judgment. To some extent the clause allows arbitrators to provide a legal interpretation that may run contrary to the strict rules of law.

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