Key takeaway: Insurance contract essentials

Insurance is a device to reduce risk and provide security. It divides an individual’s loss among a large number, spreading the loss through its mechanism. Insurance is a regulated industry and the regulatory bodies govern and safeguard the interests of the stakeholders. The acts, precedents, and practice guidelines lay out the framework. Insurance is a contract, meaning a promise or set of promises. The law provides a remedy against the breach of these promises. The law recognizes the duty of parties for the performance of the contract. It is a legally enforceable bargain based on an agreement between two or more parties. The contract may be made as follows: –

• In writing,
• Orally,
• By inference from conduct,
• By a combination of all.

Its existence is determined by objectively assessing the intention of the contracting parties.

A definition of the insurance contract should have the following features: –

• A formal, written, and coherent framework, as the legislation intended
• Scope for innovations in the future
• Should be easy to interpret
• Includes all elements and features of the concept, without ambiguity and uncertainty
• It should be flexible to inculcate relevant reforms.
• It should give purpose and rationality to include conceptions like the contract, public utility, the product, and governance.

The insurer promises in return for a money consideration (the premium) to pay to the other parties (the insured) a sum of money or to provide a corresponding benefit upon the occurrence of one or more specified events. The insurer assumes the risk of an uncertain event during the policy period and promises to provide a benefit to the insured upon an occurrence. The benefit need not be monetary and can be other services i.e. replacement or reinstatement.

The essential elements of a contract are as follows: –

• An offer
• The terms and conditions
• Acceptance of the offer
• The legal intention to contract
• Consideration
• Performance

A definition of contract of insurance should bring legal certainty. It must define the principles of insurance such as: –

• Fair presentation of risk and loss,
• Insurable interest,
• Proximate cause
• Principle of indemnity,
• Subrogation and contribution

These principles differentiate insurance contracts from other promises like guarantees and performance bonds. The American courts have regarded the risk transfer and spreading of the loss among a larger community as the primary element of a contract of insurance. The Australian approach to the definition is to understand its characteristics: –

• Considering how the contract arose
• Nature of the contract – indemnity or contingency
• How it will be performed

I hope you get an idea of an insurance contract. Stay tuned to learn in detail about principles of insurance in my next article.