Written by An insurance contract is a legally binding agreement between the insurer and the insured in which the insurer agrees to indemnify the insured against certain risks, in exchange for the premium that will be paid by the insured.
For an insurance contract to be legally binding, it is important that the insurance contract has six basic elements, namely; offer, acceptance, consideration, capacity to contract, the legality of subject matter, and insurable interest.
1. Offer: An insurance contract, like other forms of contracts, begins with a desire to enter into a contract, which is expressed by an offer.
In insurance, the offer is typically made by the insurer in the form of sending a detailed slip to the person or business seeking insurance coverage.
The detailed slip will outline the terms and conditions, coverage limits, exclusions and premiums for the proposed insurance coverage.
2. Acceptance: Once an offer has been made, it is up to the offeree to either accept or reject the offer.
The offeree, who may be a person or a company, is expected to carefully evaluate the terms and conditions of the insurance contract being offered by the insurer.
If the offeree is satisfied with the offer made by the insurer, he is expected to sign the insurance policy and/or pay the needed premium as a sign of acceptance.
Once the offeree accepts the offer, an insurance contract is created, and the terms of the policy will then be binding on both the insurer and the insured.
3. Consideration: This is yet another important element of an insurance contract.
Consideration generally refers to something given as recompense for an act or performance.
In an insurance contract, the consideration on the part of the insured is the premium that would be paid, while the consideration on the part of the insurer is the promise of financial compensation made to the insured.
For example, if you buy car insurance, the consideration will be the premium you paid to the insurer, and in return, the insurer provides consideration by agreeing to compensate you if the insured peril occurs.
Consideration is an essential element of an insurance contract because it converts a mere promise into a legally binding agreement.
4. Capacity to contract: The parties entering an insurance contract must have the capacity to contract.
This means that both the insured and the insurer must be of legal age and have the mental capacity to understand the terms of the insurance contract.
The prerequisites for capacity to contract mostly pertain to the insured rather than the insurer because insurance companies are often registered and granted licenses before they can start operations.
The capacity to contract is very important because it helps determine whether the insured is legally able to enter into an insurance contract.
If the insured lacks the capacity to contract, the insurance contract may be deemed void or unenforceable.
Generally speaking, minors, infants and drunken persons are not allowed to enter into insurance contracts because they lack the capacity to contract.
5. Legality of subject matter: For an insurance contract to be legally binding, the subject matter of the insurance contract must be legal.
The subject matter of insurance is the peril or event being insured against.
The legality of the subject matter of an insurance contract is very important because it determines whether an insurance contract will be enforceable in a court of law.
If the subject matter of an insurance contract is illegal, the insurance is not under any legal obligation to provide coverage for such risks.
And even if insurance coverage has been taken on any illegal subject matter, the court may declare the insurance contract null and void should litigation arises.
6. Insurable interest: This is a legal requirement on the part of the insured.
For an insurance contract to be valid, the person purchasing the insurance policy should have an insurable interest in the subject matter being insured.
That is, he should suffer financial loss if the subject matter is destroyed or damaged by the insured peril.
To illustrate, a car owner will suffer financial losses if his car were to be damaged. Hence, the car owner has an insurable interest in the car.
The concept of insurable interest is crucial to insurance contracts because it ensures that insurance is actually used to protect against losses, rather than as a way for speculating potential damage or losses to others.
Conclusion
To summarize, an insurance contract is a formal agreement in which an insurer promises to protect the insured against specified risks.
In order for an insurance contract to be valid. it must have six essential elements, viz:
- An offer must be made by the insurer.
- An acceptance of the offer by the insured.
- Consideration (something of value given by both parties)
- Capacity to contract (both parties being of legal age and mental capacity to understand the terms of the contract)
- The subject matter of the insurance contract must be legal.
- Insurable interest ( the insured must have a financial stake in the subject matter being insured).
If any of these elements is missing, an insurance contract may be unenforceable in a court of law.
