Chapter 2 - The Insurance Contract

What are the elements of a valid contract

1)Competent Parties. Minors, insane, or people under the influence of drugs or alcohol are not considered competent. 2)For legal purpose. Contracts for illegal things are not enforceable. 3)Agreement or Offer and Acceptance. A contract must involve at least two parties. One who makes an offer and the other who accepts the offer. An offer is a promise that requires an act or another offer in exchange. Acceptance occurs when the other party agrees to the offer or does what was proposed in the offer. 4)Consideration. This is the thing of value exchanged for the performance promised in the contract. In insurance, this would be the premium paid by the insured in exchange for coverage for covered losses by the insurer.

Parts of an insurance contract (policy)

1)Declarations. Usually, the first page of a policy. It identifies the insured(s), their address, the amount of coverage provided, a description of the property (car, house, boat, etc.) and the cost of the policy. 2)Insuring agreements. This is the heart of the policy and identifies the losses for which the insured will be covered. It also describes the property and the perils against which it is insured. 3)Conditions. "Ground Rules". These describe the obligations of both parties, the insurer and the insured. 4)Exclusions. These describe losses for which the insured is not covered, likes acts of terrorism and war, for example. 5)Definitions section. These section clarifies meanings of certain terms used in policy to prevent ambiguity. For example, "newly acquired auto" and what that means.

Characteristics of an Insurance Contract

1)Indemnity. 2)Personal. 3)Aleatory. 4)Adhesion. 5)Unilateral. 6)Contract of utmost good faith and 7)Conditional.

Aleatory

Insurance contracts are aleatory contracts because they are contingent on an uncertain event. For example, an insured may pay insurance premiums for a loss that never occurs. Or conversely, an insurance company may have to payout for a loss shortly after someone obtains insurance. In both of these examples there exists financial inequality.

Indemnity

Insurance is a contract of indemnity. Indemnity seeks to restore an individual to the approximate condition they were in prior to the loss. An individual should not profit from insurance, for this reason, speculative risks are not insurable because you can either gain or lose from such a risk.

Personal

Insurance is a personal contract because it does not insure the thing, but rather the person that owns the thing. Insurance policies are issued to policy holders not to things.

What is an insurance policy

An insurance policy is a legal contract between and insurance company and an insured, in which the insurance company will pay an insured for covered losses in exchange for the insured paying the premiums.

Conditional

Insurance policies are conditional contracts because there are a number of conditions that both the insurer and the insured must comply with. For example, with an autopolicy, you cannot let an unlicensed person living in your home drive your car. If you do, and they get into a collision, the insurer may refuse to cover the loss.

Adhesion

Insurance policies are contracts of adhesion because only the insurer draws up the terms of the contract and the insured must adhere to them. Ambiguity can cause problems in contracts of adhesion if the terms of the contract are unclear. Courts usually rule in favor of the insured in these cases.

Utmost good faith

Insurance policies are contracts of utmost good faith because each party is relying on the good faith of the other to uphold the agreement. The insurance company relies on the insured being honest and truthful when applying and the insured relies on the insurance company's ability to pay should a loss occur.

Unilateral

Insurance policies are unilateral contracts because only the insurance company is legally bound to perform its part of the agreement, if the insured has paid the premium. Insureds, however, are not legally required to pay the premium. The insured is not legally obligated to continue insurance if they no longer want to. They can stop paying premiums and therefore cancel the policy. However, for the insurance company, once a premium is paid they are obligated to cover the loss.