What Is a Triggering Event?
Let me explain what a triggering event is: it's a tangible or intangible barrier or occurrence that, once breached or met, causes another event to occur. You see these in things like job loss, retirement, or death, and they're typical in many types of contracts. These triggers help prevent or ensure that if there's a catastrophic change, the terms of the original contract can adjust accordingly.
For instance, life insurance policies might have a triggering event based on the insured's age. Many employers also require you to reach a qualifying period of employment as a triggering event to become eligible for specific company benefits. In the investment world, stops act as triggering events that you, as an investor, can initiate to limit your downside risk.
Key Takeaways
- Contracts often include contingency clauses that alter the rights and obligations of the parties involved.
- Triggering events like job loss, retirement, or death are common in various contracts.
- These triggers help manage catastrophic changes by allowing adjustments to the original contract terms.
- Insurance policies rely on important triggering events to initiate claims.
Understanding a Triggering Event
Triggering events can cover a wide range of areas and contracts. Take hedge funds, for example: they sign documents that include termination events triggered when their net asset value (NAV) falls below a certain level in a given period. These are usually outlined in an ISDA agreement, and they may result in the fund's positions being closed out by the dealer if the dealer decides to act on the trigger.
Age limits in retirement plans are another type of trigger event. For most plans like 401(k)s, you can't withdraw funds without a penalty until you reach a specific age. Once you hit that age, you're free to withdraw without penalties.
Essentially, a triggering event is any occurrence that alters the current state of a contract.
Triggering Events in Insurance
Insurance companies include triggers, known as coverage triggers, in the policies they underwrite. For property or casualty coverage, these specify the type of event that must occur for liability protection to apply. Insurers use these triggering events to limit their risk exposure.
Some typical triggering events include attainment of retirement age as defined under the plan, termination of employment, a participant becoming disabled as described under the plan, or the death of the participant.
In some universal life insurance policies, you can make in-service withdrawals from the cash portion without taxes or penalties before an age-based triggering event.
Workers' compensation is another example where a triggering event must happen for it to be effective. If you have an accident at work, that event triggers disability payouts from the insurance.
The most common triggering event in an insurance policy is whatever causes a claim to be initiated. In life insurance, for example, the death of the insured triggers the payout of the death benefit to the beneficiaries.
Triggering Events With Banks
Banks commonly issue debt at a given interest rate with specific terms. When writing a loan, one requirement might be that you, the borrower, don't incur any additional debt during the loan's duration.
If you do take on more debt, that breaches the contract's triggering event or clause, and the bank can take actions to protect itself, such as foreclosing on secured property or increasing the original interest rate.
Triggering events also relate to defaults on loans. Banks can stipulate certain triggers that determine a default. If any pre-agreed covenants are breached, that triggers a default. Cross defaults are common, where defaulting on one loan means you've defaulted on all others under the cross-default agreement.
Banks can include a wide range of default triggering events, so you need to carefully understand your contract before signing.
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