Insurance Contracts

An insurance contract is a document representing the agreement between an insurance

company and the insured. Central to any insurance contract is the insuring agreement, which
specifies the risks that are covered, the limits of the policy, and the term of the policy.
Additionally, all insurance contracts specify:

 conditions, which are requirements of the insured, such as paying the premium or
reporting a loss;
 limitations, which specify the limits of the policy, such as the maximum amount that the
insurance company will pay;
 exclusions, which specify what is not covered by the contract.

Obviously, the contents of an insurance contract depends on the type of policy, what the
insurance applicant wants, and how much he is willing to pay. The details of insurance policies
are covered in Standard Insurance Policies. This article covers what is required of valid
insurance contracts, since only valid contracts are legally enforceable.

There are 4 requirements for any valid contract, including insurance contracts:

1. offer and acceptance,

2. consideration,
3. competent parties, and
4. legal purpose.

Insurance contracts have an additional requirement that they be in legal form. Insurance
contracts are regulated by state law, so insurance contracts must comply with these requirements.
The state may stipulate that only certain forms may be used for certain types of insurance or that
the contract must have certain provisions. Additionally, contracts must be approved by the state
insurance department before they can be used, to ensure that they comply with regulations.

If a contract lacks any of these essential elements, then it is a void contract that will not be
enforced by any court. For instance, most contracts signed by a minor are void contracts because
they are not legally competent. A voidable contract is one that can be nullified by a party if the
other party breaches the contract, or because material information was omitted or false in the
contract. The party with the right to void can also choose to enforce it, instead. For instance,
insurance companies can often void a contract because the applicant provided false information
on the application. Thus, if someone was in an auto accident, and that person previously filled
out the insurance application stating that he had no speeding tickets, when, in fact, he had, then
the insurance company can void the contract and not pay the claim. Although most contracts can
be oral, most are written, especially insurance contracts, because of their complexity.
Offer and Acceptance

In insurance, the offer is typically initiated by the insurance applicant through the services of an
insurance agent, who must have the authority to represent the insurance company, by filling out
an application for insurance. Sometimes the application for insurance can be filed directly with
the insurance company through its website. How the offer is accepted will depend on whether the
insurance is for property, liability, or life insurance. For property and liability insurance, the offer
is the application for insurance and the payment of the 1 st premium, or the promise to do so. In
most personal lines of insurance, the agent can, in most cases, accept the offer for the company,
binding the company to the contract. A binder is a temporary contract that can be oral or written
that binds the insurance company to the contract immediately until it has a chance to examine the
application, and issue a formal policy. Through the binder, the insurance becomes effective
immediately. Most binders are written and include general information, such as the type and
amount of insurance, the name of the parties, and the time during which the binder is effective.
However, once a formal policy is issued, then the terms of the policy override the binder. This is
particularly true for oral binders, for once a written policy is issued, the parole evidence rule
makes the written policy determinative where there is any conflict between the oral and written
agreement. If a mistake was made in the policy, such as mistyping the wrong policy value, then
the contract can be reformed by correcting the mistake to prevent unjust enrichment of either
party.

However, some agents cannot bind the insurance company, in which case, the insurance
company must receive and accept the application, or it can reject it. The insurance is not
effective until the company accepts the application.

In life insurance, the agent never has the power to bind the company. In most cases, the applicant
fills out the application and pays the 1st premium. The applicant is then given a conditional
premium receipt — the most common type of receipt is the insurability premium receipt. If
the applicant is insurable according to the company's underwriting standards, then the life
insurance becomes effective from the date of the application, or, in some cases, from the date of
the medical examination.

However, if the premium is not paid when the application is filled out, then the insurance will
not become effective until the policy is delivered and the premium is paid, and the applicant is in
good health when the policy is delivered. Some companies require that the applicant not receive
any medical treatment between the application and the delivery of the policy; otherwise the
policy will not become effective.

Thus, a conditional receipt is like a binder, but differs from it because coverage is conditional
upon the health of the applicant, occupation, and other factors. A binder does not require the
payment of a premium to become effective —  often the insurer needs the time to determine
what the premium will be.
Contracts of Adhesion

While the insurance applicant is usually considered the one making the offer, the insurance
company dictates the terms of the contracts. The insurance applicant must accept the contract of
adhesion totally or not at all. Because of differing legal definitions and rulings provided by
different courts in the past and because of requirements imposed by state governments and their
agencies, an insurance contract must be carefully worded to be legally effective and to provide
coverage in the way that it was intended. This is why insurance contracts offered to the public
are standardized. Another reason is because insurance companies can only calculate competitive
premiums based on actuarial studies, and these studies are based on certain limitations and
underwriting guidelines. Thus, most insurance contracts cannot be negotiated. However, the
insured can request specific riders and exclusions to the policy. A rider (aka endorsement) is an
amendment or addition to the basic policy that allows the policy to be tailored in acceptable ways
for individual situations. An exclusion is a loss not covered by the contract.

Because insurance contracts are generally not negotiable, the courts have created case laws to
benefit the insured. The first law, applicable to contracts generally, is that where there is an
ambiguity in a contract, the ambiguity is construed against the maker of the contract,
which, in insurance, is the insurance company. Thus, if the terms of a contract are not specific,
then the terms are interpreted in a way that would most benefit the insured. Another case law that
has developed is the principle of reasonable expectations, which requires that any exclusion or
other qualification be conspicuous; otherwise, the insured is entitled to coverage that he
reasonably expects.

Life insurance and some health insurance contracts usually have entire contract clauses that
require the attachment of any statements, including the application, made by the insured to the
contract itself, to prevent any disputes later. Entire contract clauses also prevent incorporation
by reference, which is alluding to other written works, such as the corporate bylaws, that the
insurance applicant probably hasn't read.

Personal Contracts

Property insurance contracts are personal contracts between the insured and the insurer. Property
insurance covers the insured for the financial losses of property damage or loss, not the property
itself. If the insured sells the property, the insurance does not transfer with it. The insurance
cannot be assigned to anyone else without the insurer's consent. If property and liability contracts
could be freely assigned, then someone who presents a low risk for the covered loss could buy a
policy and sell it or give it to someone with a higher risk, rendering the premium inadequate to
cover the greater loss exposure. For instance, a parent could buy automobile insurance for
himself, then decide to assign the policy to his teenage child, who generally would have to pay a
higher rate, since teenagers have a higher accident rate than other groups.

On the other hand, life insurance policies can be freely assigned, because the person insured
remains the same. Indeed, many people who have acquired a terminal illness have sold their life
insurance policies to 3rd parties to get money to treat their illness or to provide care.
Beneficiaries can be changed, because changing beneficiaries does not change the insured risk,
so there is no consequence to the insurer if the policy owner changes the beneficiaries, but the
insurer must be notified before the change has any legal effect. This is to protect the insurance
company from paying the wrong person or from being forced to pay twice.

Consideration

Consideration is the value that the parties to a contract give to each other — it is why the
contract is agreed to. In insurance contracts, the insurer promises to pay for covered losses that
the insured suffers, and the insured promises to abide by the contract and pay the premium. Most
non-insurance contracts are bilateral contracts where the promises that each party makes are
enforceable by the other party through legal proceedings. However, insurance contracts are
unilateral contracts, where only the insurer makes a legally enforceable promise to pay for
covered losses. The company cannot sue the insured for breach of contract. However, insurance
contracts are also conditional contracts — if the insured fails to pay the premium, or fails to
abide by the contract, then the insurer is not obligated to pay for any of the insured's losses.

Most non-insurance contracts are commutative contracts — the amount of consideration given
by both parties are usually fairly equal. Thus, a contract to purchase real estate usually requires a
payment equal to its value. Insurance contracts are, however, aleatory contracts, because the
insurance company must pay only if certain events occur. If they don't occur, the company never
has to pay, even if the insured has paid premiums for decades. However, if a covered loss does
occur, then the insurance company may have to pay much more than it has collected in
premiums. Thus, aleatory contracts are characterized by unequal consideration.

Competent Parties

The parties to the contract must be legally competent to agree to them. Most adults have legal
capacity to agree to contracts, unless they are intoxicated, mentally ill, or mentally retarded. The
key requirement is that the parties must know what they are agreeing to — a meeting of the
minds; otherwise, there could be no agreement. To protect minors, the law does not give them
legal capacity to agree to contracts except where specified by law.

An insurance company has legal capacity if it is licensed to sell insurance in that particular state,
and is acting within the scope of its charter.

Legal Purpose

All contracts must have a legal purpose to be enforceable by the courts, and, of course, most
insurance contracts do.

Performance and Discharge of Insurance Contracts

The performance required of most insurance contracts is for the insured to pay premiums and
perform any other duties that are required by the contract, while the insurer's main duty is to pay
for losses, if any occur. Most insurance contracts, such as policies for property, liability, and
health insurance, are indemnity contracts, where the insurance company is only required to
compensate for actual losses, up to the policy limits. However, some contracts, such as life
insurance policy contracts, pay the face amount of the policy. In most cases, aside from the
payment of the premium by the insured to the insurer, neither party needs to perform until a loss
occurs, but when a loss does occur, then the insured must initiate performance before the insurer
is required to do anything.

Insurance contracts require the insured to perform specific things or requires certain conditions,
both before and after a loss, which the law sometimes categorizes as conditions precedent and
conditions subsequent. If the insured fails to perform these duties or satisfy these conditions, then
the insurance company may be relieved of its obligation to pay the claim because of the breach
of contract. However, in most jurisdictions, a court will only grant relief to an insurer's
obligation to pay a claim if the breach is material.

A condition precedent is either a condition that must be satisfied or something that the insured
must do before or when a loss occurs and before the insurer will perform, which, in most cases,
is by paying the claim. If the insured does not satisfy a material condition precedent, then the
insurer may be relieved of paying the claim. Some common conditions precedent include:

 requiring the insured to notify the insurer of any loss;

 property insurance requires that the insured provide an inventory of the losses;
 disability insurance requires the insured to submit proof of disability to the insurer.

A condition subsequent is a condition that must be fulfilled after an event that required an act
by the insurer. For example, if the insurance company wants to exercise its subrogation rights
and sue a 3rd party for the insured's cause of loss, then the insurer may require the insured to
testify in court.

Insurance contracts can be ended by mutual agreement — recission. The insured can terminate
the contract by not paying the premium. If the insurance company has evidence of fraud, it can
ask a court to rescind a contract unilaterally. However, life insurance policies usually have an
incontestable clause which prevents an insurer from canceling a life insurance policy after a 1
or 2 year period. The initial period gives the insurance company time to check the facts in the
application, and possibly rescind the contract if it detects fraud. However, after this period, the
life insurance cannot be canceled by the company for any reason other than nonpayment of the
premium.