Chapter 2 - The Insurance Contract

Insurance contracts must contain 4 elements for it to be valid:

1. Competent parties 2. Legal Purpose 3. Offer and Acceptance 4. Consideration

Parts of the Insurance Contract:

1. Declarations. 2. Insuring agreements 3. Conditions 4. Exclusions 5. Definitions

Characteristics of an Insurance Contract

1. Principle of Indemnity 2. Personal 3. Aleatory 4. Adhesion 5. Unilateral 6. Contract of Utmost Good Faith 7. Conditional

Offer and Acceptance

3rd element of a valid contract; means that the contract involves 2 parties: one who makes an offer and one who accepts it.

Competent Parties

A contract is not valid unless it is made between two parties who are considered competent under the law. In most cases, a person who is a minor, insane, or under the influence of alcohol or drugs is considered incompetent.

Personal

An insurance company does not insure property; it insures the person who owns the property

Exclusions

Describe the losses for which the insured is not covered. If an excluded loss occurs, the insured will not be indemnified.

Legal Purpose

The second requirement for a valid contract is that it be formed for a legal purpose

Declarations

Usually on the first page of the policy; contains information such as the name of the insured, the address, the amount of coverage provided, a description of the property, and the cost of the policy.

Adhesion

When one party has greater power over the other party in drafting the contract. The provisions of the contract are prepared by one party - the insurer. The other party, the insured, does not take part in the preparation of the contract.

Consideration

4th requirement for a valid contract; a thing of value exchanged for the performance promised in the contract. With insurance, the consideration that the insured gives is the premium payment. The consideration that the insurer gives is the promise to pay for certain losses suffered by the insured.

Unilateral

Means one sided. An insurance policy is one sided because only the insurance company is legally bound to perform its part of the agreement.

Conditions

States the ground rules for the policy. They describe the responsibilities and the obligations of both the insurance company and the insured.

Contract

A legal agreement between two competent parties that promises a certain performance in exchange for a certain consideration

Conditional

An insurance policy includes a number of conditions that both the insured and the insurer must comply with.

Principle of Indemnity

States that when a loss occurs, an individual should be restored to the approximate financial condition he was in before the loss, no more and no less.

Contract of Utmost Good Faith

The insurance company relies on the truthfulness and integrity of the applicant when issuing a policy. In return, the insured relies on the company's promise and ability to provide coverage and pay claims.

Doctrine of Reasonable Expectations

states that a policy includes coverage's that an average person would reasonably expect it to include, regardless of what the policy actually provides. Courts rely on this to resolve any ambiguity in policy wording in favor of the insured.

An insurance contract is __________________, which means it is contingent on an uncertain event (a loss) that provides for unequal transfer of value between the parties.

Aleatory

Insuring Agreements

The heart of the policy; state in general what is to be covered or, in other words, the losses for which the insured will be indemnified. This section also describes the type of property covered and the perils against which it is insured.

Definitions

This section clarifies the meanings of certain terms used in the policy