The Insurance Policy as a Contract

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The Insurance Policy as a Contract

An insurance policy is a legal contract between the insurer and the insured, it is designed to serve a very specific purpose and has specific characteristics not found in other contracts.

In a basic legal contract, we have four elements that also pertain to insurance contracts

The first element is you must have Competent Parties

This means that all parties involved in the contract must have the legal capacity to enter into a contract, those without the legal capacity to do so include: Persons who are underage( Unless purchasing auto insurance), mentally insane, or under the influence

The second element is Legal Purpose

Legal Purpose means that all parties in the contract must enter it for a legal purpose; public policy cannot be violated by a legal contract. In an insurance contract, it is important to understand that all parties that are entering the contract must enter it in good faith. So if the insured signs the contract knowing they will commit fraud they are violating this aspect of the insurance contract as they are not entering the contract in good faith.

The third element is Agreement

This means that one party must make and communicate an offer to the other party and the second party must accept that offer.

• Offer – The offer for entering an insurance contract is the application submitted by the applicant.
• Acceptance – The acceptance of an insurance contract takes place when the insurance company agrees to issue insurance. A counteroffer by the insurance company is not accepted until the applicant accepts the counteroffer.

The fourth element is Consideration

Consideration means that something of value is exchanged; or as it pertains to insurance the exchange of an act for a promise. For example, the consideration made by the applicant is the premium payment, while the consideration made by the insurer is its promise to pay for covered losses.

There are six key characteristics of Insurance Contracts

Insurance contracts are Personal, this means

The contract covers the person, not the property and protects the policyholder from financial losses. Because the contract is personal it does not protect property from becoming damaged but rather indemnifies the insured for costs associated with restoring damaged property

Insurance is a contract of Adhesion, this means

The insurer is responsible for drafting the terms of the contract, of which the insured has no say in the wording, However, the contract should be interpreted as a reasonable person would interpret it, because of this in the event of ambiguity, a court of law favors the insured.

Insurance contracts assume the Utmost Good Faith, this means  

• An insured is expected to be completely honest about the risk to the insurer, thus the insurer must rely on applicants not to conceal or misrepresent pertinent facts

Insurance contracts are Aleatory, this means

• The contract is dependent on an unknown future event, therefore, neither party can know of future losses.
• The insurer only has to pay if and when covered losses occur but can also pay more in claims than it receives, and the same goes for the insured because a policyholder could pay more in premiums then they ever get for claims.

Insurance contracts are Unilateral, this means

• The insurer has an obligation to pay for covered losses, while the insured has no obligation and can stop paying premiums at any time.

Insurance contracts are Conditional, this means

• The insurer only has to act if certain conditions are met, and the insured must fulfill all conditions listed in the policy.

Contracts also have ways that they can be voided below are examples of how this can happen.