Chapt

er-
Four
LEGALPRI
NCI
PLESOFI
NSURANCECONTRACTS
Lear
ningobj
ect
ives:
Af
terst
udy
ingt
hischapt
er,
youshoul
dbeabl
eto:
 Explai
nthe fundamentallegalpri
ncipl
es t
hatar
eref
lect
ed i
ninsur
ance cont
ract
s,
i
ncludi
ngthe:
 Princi
pleofi
nsurabl
eint
erest
 Princi
pleofi
ndemnity
 Pr
inci
pleofsubr
ogat
ion
 Pr
inci
pleofcont
ri
but
ion
 Pr
inci
pleofut
mostgoodf
ait
h.
I
nsurance i
s af
fected bylegalagr
eements known as cont
ract
s orpoli
cies.The l
egal
pr
inci
plesofi
nsurancethatar
egener
all
yappl
icabl
earedi
scussedasfol
lows:

4.
1.Princi
pleofInsurableInterest
Theprincipl
eofi nsurabl
ei nterestisoneoft heimpor t
antlegalpri
ncipl
es.Thepr i
ncipl
eof
i
nsurableinter
eststatesthatt heinsuredmustbei nposi t
iontolosefinanci
all
yifacov ered
l
ossoccur s.Forexampl e,youhav eani nsurabl
eint
er estinyourcarbecausey oumayl oss
fi
nanci
allyifthecarisdamagedorst olen.Youhav eani nsurabl
einteresti
ny ourpersonal
proper
ty,such asTel evi
sion,comput er,becausey ou losef i
nanci
allyifthepr opert
yi s
damagedordest royed.

Thesubj
ect
-mat
teri
nsur
edmaybepr
oper
tyofv
alue,l
i
feofaper
sonoranev
entt
hatmay
causeal
egall
i
abi
l
ity
.Itappl
i
est
obot
hli
feandnon-
li
fei
nsur
ance.Forexampl
e:I
nthecase
ofpr
oper
tyowner
shi
p,t
heownerhasaf
inanci
ali
nter
esti
nthesaf
etyoft
hepr
oper
ty.He
suf
fer
saf
inanci
all
ossi
ntheev
entofdest
ruct
ionoft
hepr
oper
tybyacci
dent
almi
sfor
tune.
Hemay
,then,pur
chasei
nsur
ancet
opr
otecthi
sfi
nanci
ali
nter
esti
nthepr
oper
ty.I
nsum,
undert
hispr
inci
pleani
nsur
edmustdemonst
rat
eaper
sonall
oss,unl
esst
hei
nsur
edwi
l
lbe
unabl
etocol
l
ectamount
sduewhenal
ossduet
othei
nsur
edper
iloccur
s.
Theessent
ial
ofi
nsur
abl
eint
erestar
easf
oll
ows:
i
.Pr
esenceofsubj
ectmat
tert
obei
nsur
ed

1
i
i
.Exi
stenceofmonet
aryr
elat
ionshi
pbet
weent
hesubj
ectmat
terandpol
i
cyhol
der
i
i
i.Ther
elat
ionshi
pexi
sti
ngbet
weent
hepol
i
cyhol
derandt
hesubj
ectmat
terneedt
obel
egal
i
v.Thepol
i
cyhol
derwi
l
leconomi
cal
l
ybenef
it
edbyt
hesur
viv
alorsuf
feraneconomi
closs
f
rom t
hedamageordest
ruct
ionoft
hesubj
ectmat
ter
.

4.
1.1.Whyi
nsur
abl
eint
erest
?
Tobel
egal
l
yenf
orceabl
e,al
linsur
ancecont
ract
smustbesuppor
tedbyani
nsur
abl
eint
erest
f
ort
hef
oll
owi
ngr
easons.
 To pr
eventgambl
i
ng-
ifi
tis notf
ori
nsur
abl
e cont
ract
s,t
he cont
ractwoul
d be
gambl
i
ngcont
ractandwoul
dbeagai
nstpubl
i
cint
erest
.Fori
nst
ance,
onecoul
dinsur
e
t
hepr
oper
tyofot
herandhopef
orear
lyl
oss/
evenmayengagei
nwi
l
lfuldest
ruct
ions
ofpr
oper
ty.
 Tor
educemor
alhazar
ds-I
fiti
snotf
ori
nsur
abl
econt
ract
s,adi
shonestper
soncoul
d
pur
chaseapr
oper
tyi
nsur
ancecont
ractt
osomeoneel
se’
spr
oper
tyandi
ntent
ional
l
y
causeal
osst
orecei
vet
hepr
oceeds.
 Tomeasur
ethel
oss-
insur
abl
eint
erestmeasur
est
heamountofi
nsur
ed’
sloss.I
fthe
l
osspay
mentcannotexceedt
heamount
sofoncei
nsur
abl
eint
erest
,thepr
inci
pleof
i
ndemni
tyi
ssuppor
ted.
One i
mpor
tanti
ssue i
sdet
ermi
ning whi
ch per
son oror
gani
zat
ionscan hav
einsur
abl
e
i
nter
est
.Iti
shel
pful
ltodi
sti
ngui
shbet
weenani
nsur
abl
eint
eresti
nli
fe,
proper
tyandl
i
abi
l
ity
i
nsur
ance.
 Li
feI
nsur
ance:
i
.Li
fei
nsur
anceonone’
sownl
i
fe
 Ani
ndi
vi
dualhasani
nsur
abl
eint
eresti
nhi
sownl
i
feandt
her
eisnol
i
mitt
othesum
f
orwhi
chamanmayi
nsur
ehi
sownl
i
fe.I
npr
act
ice,t
hesum i
nsur
edi
srest
ri
ctedby
i
nsur
er’
sunder
wri
ti
ngr
ulesast
othemaxi
mum amountofi
nsur
ancet
hatcanbe
wr
it
tenonanysi
ngl
eli
fe.
i
i
.Pur
chasi
ngal
i
fei
nsur
ancepol
i
cyont
hel
i
feofot
her
-i
nthi
scaseonemusthav
ean
i
nsur
abl
eint
eresti
nthatper
son’
sli
fe.
 Husbandandwi
fe:awi
femayi
nsur
ethel
i
feofherhusbandbecausehi
scont
inued

2
 exi
stencei
sval
uabl
etoherandshewoul
dsuf
feraf
inanci
all
ossuponhi
sdeat
h,and
v
ice-
ver
sa.
 Cr
edi
tor
sandDebt
ors:acr
edi
torst
andst
olosei
fhi
sdebt
ordi
eswi
thoutpay
ingt
he
debt
.Thus,
hehast
her
ightt
oinsur
ethedebt
orupt
otheamountoft
hel
oan.
 Par
tner
s:t
hedeat
hofapar
tnercoul
dwel
lcausef
inanci
all
osst
othesur
viv
or(
s),who
t
her
efor
e,hav
ear
ightt
oinsur
ehi
m.Thi
scoul
dar
isewi
thapr
ofessi
onalf
ir
m or
per
hapswi
tht
heat
ri
calpr
oducer
sint
hel
i
feofact
or.Theamountofi
nsur
abl
eint
erest
woul
dbedi
ff
icul
ttoascer
tai
n,butl
egal
l
yiti
sli
mit
edt
othef
inanci
ali
nvol
vementi
nthe
per
soni
nsur
ed.
 AFat
her-mayi
nsur
ethel
i
feofami
norchi
l
d.

 Propertyandliabi
li
tyI
nsurance:
Insur
able inter
est in propert
y and l iabi
l
ityinsur
ance may ar i
se by means of a
pecuniar
y/fi
nancial
/r el
ati
onship between the i
nsur
ed and the subjectmatteroft he
i
nsurance.Theobv i
ousoft heser el
ati
onshipsareownershi
p,pot
entiallegall
i
abi
li
ty,and
securedcredi
tors.

Ownershi
p
-
Inaddi
ti
ont
oful
lowner
shi
p,par
torj
ointowner
shi
pgi
vest
her
ightt
oinsur
e.

Husbandandwi
fe
-Ahusbandhasaninsurabl
einterestinhi
swife’
spropert
yasheislegal
l
yenti
tl
edtoshare
herenj
oymentofit
,andawi fesimilar
lyhasaninsur
ablei
nter
esti
nherhusband’
sproper
ty
asthei
rrel
ati
onshi
pisreci
procal.

Admi
nist
rat
ors,
Execut
orsandTr
ust
ees
- Thesear eallpersonsentr
ustedwiththeestat
eandaff
air
sofot
her
s.Theyhav
ea
r
ightt
oinsur
ethepropert
yforwhichtheyar
eresponsi
ble.

Bai
l
er’
s
- Thesear eper sonsorenti
ti
eslegal
lyinpossessesofgoodsbel
ongi
ngtoothers.For
exampl e,laundri
eshav etheri
ghttoinsureforl
osstogoodsinthei
rcust
odyrepr
esenting
interestoftheowner .
4.
1.2.Whenmustani nsurabl
eint
erestexi
st?
I
npr opertyandl i
abil
it
yi nsur
anceitispossibl
etoeffectcover
ageonpropert
yinwhicht he

3
i
nur
eddoesnothav
eani
nsur
abl
eint
erestatt
het
imet
hepol
i
cyi
swr
it
ten,
buti
nwhi
chsuch
ani
nter
esti
sexpect
edi
nthef
utur
e.Asar
esul
tthecour
tsgener
all
yhol
dthati
npr
oper
ty
i
nsur
ance,i
nsur
abl
eint
erestneedt
oexi
stonl
yatt
het
imeoft
hel
oss,andnotatt
he
i
ncept
ionoft
hepol
i
cy.
Ont
heot
herhand,i
nli
fei
nsur
ancei
tist
hegener
alr
ulet
hati
nsur
abl
eint
erestmustexi
stat
t
hei
ncept
ionoft
hepol
i
cy,
buti
tisnotnecessar
yatt
het
imeoft
hel
oss.Thecour
tsv
iewl
i
fe
i
nsur
anceasani
nvest
mentcont
ract
.Toi
l
lust
rat
e,assumet
hatawi
fewhoownsal
i
fe
i
nsur
ancepol
i
cyonherhusbandl
aterobt
ainsadi
vor
ce.I
fshecont
inuest
omai
ntai
nthe
i
nsur
ancebypay
ingt
hepr
emi
ums,shemaycol
l
ectont
hesubsequentdeat
hofherf
ormer
husband,
event
houghshei
sremar
ri
edandsuf
fer
snopar
ti
cul
arf
inanci
all
ossuponhi
sdeat
h.
I
tissuf
fi
cientt
hatshehadani
nsur
abl
eint
erestwhent
hepol
i
cywasf
ir
sti
ssued.

4.
2.Pr
inci
pleofI
ndemni
ty
Thepr
inci
pleofi
ndemni
tyst
atest
hataper
sonmaynotcol
l
ectmor
ethant
heact
uall
ossi
n
t
heev
entofdamagecausedbyani
nsur
edper
il
.Thus,whi
l
eaper
sonmayhav
epur
chased
cov
eragei
nexcessoft
hev
alueoft
hepr
oper
ty,t
hatper
soncannotmakeapr
ofi
tby
col
l
ect
ingmor
ethant
heact
uall
ossi
fthepr
oper
tyi
sdest
roy
ed.Manyi
nsur
ancepr
act
ices
r
esul
tfr
om t
hispr
inci
ple.Onl
ycont
ract
sinpr
oper
tyandl
i
abi
l
ityi
nsur
ancear
esubj
ectt
othi
s
pr
inci
ple.Li
feandmostheal
thi
nsur
ancepol
i
ciesar
enotcont
ract
sofi
ndemni
ty.Nomoney
pay
ment
scani
ndemni
tyf
orl
ossofl
i
feorf
orbodi
l
yinj
uryt
othei
nsur
ed,
andt
hati
swhyl
i
fe
i
nsur
ancei
sanexcept
iont
othegener
alr
ule.
I
nanyev
ent
,thepur
poseser
vedbyt
hepr
inci
pleofi
ndemni
tyi
stopl
acet
hei
nsur
edi
nthe
sameposi
ti
onasbef
oret
hel
oss.
4.
2.1.Met hodsofPr ovidi
ngI ndemnity
Therearef ourbasicmet hodsofpr ovidi
ngani ndemni t
y:
i
.CashPay ment/Actualcashv ale==>manycl ai
msar eset tl
edbymeansofacash
paymentt otheinsured.Inproper t
yinsurance,thestandardmet hodofi ndemni
fyi
ngthe
insuredisbasedont heactualcashv alueoft hedamagedpr opertyatthetimeofloss.
Courtshav eusedt hreemaj ormet hodstodet ermineactualcashv al
ue:
a)Repl acementcost( curr
entr estor
ati
oncost )l
essdepr eciati
on( phy
sicalwear
sand
t
ear s,
ageandeconomi cobsolescence)

4
 b)Fai rmar ketv alue-isapr i
ceawi l
lingbuy erwoul dpayawi l
li
ngsel leri nfreemar ket
.
Notet hatt hef airmar ketv alueofapr oper t
ymaybebel ow itsact ualcashv alue
basedonr epl acementcostl essdepr eciation(e.g.poorl ocati
onofbui lding).
c)Br oadev idencer ule-wher et hedeter minationofact ualcashv al
ueshal lber equiredt o
i
ncludeal lr elevantf actorst odetermi net hev al
ueoft hepr oper t
y-replacementcost
l
essdepr eci ation,f airmar ketv al
ue, presentmar ketv alueofsi mi l
arpr oper t
y ,opinion
ofappr aiser sandot hernumer ousf actors.
ii
. Repai r
==>t hi sf orm ofset tl
ementi spar ti
cularl
ycommoni nmot orinsur ance,wher e
thei nsur erset tl
est herepairbilldir
ectwi t
ht hegar ageconcer ned.
i
i
i. Repl acementoft hepr operty==>e. g.ingl assinsur ance, iti
st heusualr uletor eplace,
andal linsurerspr i
det hemsel vesont hespeedwi thwhi cht heyr eplaceshopwi dowsso
thatthereismi ni mum di sturbanceoft rade.
i
v. Rei nstatementoft hepr operty==>t hisisat erm usual lyf oundi nf i
rei nsur anceand
concernst her est orati
onorr ebuildi
ngofpr emi ses(notnecessar il
yont hesamesi te)t o
thei
rformercondi ti
on.

4.2.
2.Exceptiontothepr i
ncipl
eofindemni ty
Therear esev eralimportantexcept i
onst ot hepr i
nci
pleofi ndemnit
y.Theyi ncl
udethe
foll
owing.
a)Val uedpolicy-
isonet hatpay sthef aceamountoft heinsuranceregardl
essofactual
cashvalueifat ot
allossoccurs.E.g.Insuranceforf
inearts,r
arepai
ntingandetc.ar
eof
suchkind.
b)Lifeinsurance-i
svaluedpolicythancont r
actofindemnit
y.

4.4Princi
pleofSubr ogat i
on
Undert hepr i
ncipleofsubr ogationonewhohasi ndemni fi
edanot her’sl ossisent i
tl
edt o
recoveryfrom anyl i
ablet hi
rdpar ti
eswhoar eresponsible.Thus,subr ogationininsuranceis
thetr
ansf erbyani nsur edtoani nsurerofanyri
ghtst oproceedagai nstat hirdpart
ywhohas
negli
gentlycausedt heoccur r
enceofani nsur
edloss.Theobj ecti
vebehi ndsucht ransferof
ri
ghtf rom theinsur edt othei nsurerist oeli
minatet hepr ofi
tmot i
ve.I.e.topr ohi
bitthe
i
nsuredf rom coll
ectingdoubl epay ments:fr
om theinsurerandf r
om t hethirdparty.
Automobi leinsurert hathaspai dacol l
usioninsurancecl aim obtainst her i
ghtt ocoll
ect
r
eimbur
sementf
rom anynegl
i
gentt
hir
dpar
tywhocausedt
heacci
dent
.Subr
ogat
ioni
sa
cor
oll
ary
/resul
toft
hepr
inci
pleofi
ndemni
tyandt
her
ightofsubr
ogat
ion,t
her
efor
e,appl
i
es

5
onl
ythepol
i
cies,whi
char
econt
ract
sofi
ndemni
ty.I
not
herwor
ds,i
tisnotappl
i
cabl
etol
i
fe
i
nsur
anceandmosti
ndi
vi
dual
heal
thi ances.
nsur
Exampl
eifMr
.Dnegl
i
gent
lycausesdamaget
oMr
.Espr
oper
ty,
Mr.E i
nsur
ance company
wi
l
lindemni
fyEt
otheext
entofi
tsl
i
abi
l
ityf
ort
heE’
slossandt
henhav
ether
ightt
opr
oceed
agai
nstDf
oranyamounti
thaspai
doutunderEspol
i
cy.Oneoft
hei
mpor
tantr
easonsf
or
subr
ogat
ioni
stor
einf
orcet
hepr
inci
pleofi
ndemni
tyt
hati
stopr
eventt
hei
nsur
edf
rom
col
l
ect
ingmor
ethant
heact
ualcashl
oss.I
fE’
sinsur
erdi
dn’
thav
ether
ightt
osubr
ogat
eit
woul
dbepossi
blef
orMr
.Et
orecov
erf
rom t
hepol
i
cyandt
henr
ecov
eragai
ninal
egal
act
ion
agai
nstD.I
nthi
scaseMr
.Ewoul
dcol
l
ectt
wice.I
twoul
dbepossi
blef
orEt
oar
rangean
acci
dentwi
thDt
ocol
l
ectt
wiceandspl
i
tthepr
ofi
twi
thD.Amor
alhazar
dwoul
dexi
stand
t
hecont
ractwoul
dtendt
obecomeani
nst
rumentoff
raud.

Subr
ogati
onhast
hef ol
l
owi
ngbasicpurposes:
 Itpr
event
stheinsur
edf
rom coll
ect
ingtwicef
ort
hesamel
oss(
butt
hei
nsur
edmustbe
r
eimbur
sedi
nful
lfort
hel
oss:t
hei
nsur
eri
sthenent
it
ledt
oanyr
emai
ningbal
anceupt
o
t
hei
nsur
er’
sint
erestwi
thanyr
emai
ndergoi
ngt
othei
nsur
ed.
 I
thel
pst
ohol
dthegui
l
typer
sonr
esponsi
blef
orl
oss
 I
tmakest
hebur
denofl
osst
obemor
enear
lypl
acedont
heshoul
deroft
hoser
esponsi
ble

N.B.Thattheinsurercannotsubr ogateagai
nstitsowninsur
ed’s.Iftheinsurercouldrecover
alosspay mentf orcov eredloss,thebasicpurposeofpurchasingt heinsurancewoul dbe
defeat
ed.Andt hei nsur
edcannoti mpairt
heinsurer
’ssubr
ogati
onr ight;
butinsurercanwai ve
i
tssubrogati
onr ightinthecont r
act
.
4.
3. Pr inci
pleofCont ribut
ion
Contri
but
ionist her i
ghtofani nsur
erwhohaspai dunderapolicy,tocalluponot heri
nsurers
equal
l
yorot
her
wisel
i
abl
efort
hesamel
osst
ocont
ri
but
etot
hepay
ment
.Wher
ether
eis
ov
er-
insur
ancebecauseal
ossi
scov
eredbypol
i
ciesaf
fect
edwi
tht
woormor
einsur
ers,
the
pr
inci
pleofi
ndemni
tyst
il
lappl
i
es.I
ntheseci
rcumst
ances,
thei
nsur
edwi
l
lonl
ybeent
it
ledt
o
r
ecov
ert
hef
ullamountofhi
slossandi
fonei
nsur
erhaspai
douti
nful
l
,hewi
l
lbeent
it
ledt
o
not
hingmor
e.

6
Li
ke subr
ogat
ion,cont
ri
but
ion suppor
tst
he pr
inci
ple ofi
ndemni
tyand appl
i
es onl
yto
cont
ract
sofi
ndemni
ty.Ther
eis,t
her
efor
e,nocont
ri
but
ioni
nper
sonalacci
dentandl
i
fe
pol
i
ciesunderwhi
chi
nsur
erscont
ractt
opayspeci
fi
csumsont
hehappeni
ngofcer
tai
n
ev
ent
s.Suchpol
i
ciesar
enotcont
ract
sofi
ndemni
ty,exceptt
otheext
entt
hatt
heymay
i
ncor
por
ateabenef
itbywayofi
ndemni
ty,e.
g.,pay
mentofmedi
calexpensesi
ncur
red,i
n
whi
chr
espectcont
ri
but
ionwoul
dappl
y.
I
tisi
mpor
tantt
o under
stand t
he di
ff
erence bet
ween cont
ri
but
ion and subr
ogat
ion.
Subr
ogat
ioni
sconcer
nedwi
thr
ight
sofr
ecov
eryagai
nstt
hir
dpar
ti
esorel
sewher
einr
espect
ofpay
mentofani
ndemni
ty,andneednoti
nvol
veanyot
heri
nsur
ance,al
thoughi
tfr
equent
ly
does.Cont
ri
but
ionnecessar
il
yinv
olv
esmor
ethanonei
nsur
anceeachcov
eri
ngt
hei
nter
est
oft
hesamei
nsur
ed.

Thepr
inci
pleofcont
ri
but
ioni
snotappl
i
cabl
eforl
i
fei
nsur
anceandper
sonal
acci
dent
.

Cont
ri
but
ion=Sum insur
edwit
hthepar
ticularinsur
erxLoss
TotalSumsinsur
edwit
hallinsurers
Exampl
e:
Assumet
hatAt
oKebedehasi
nsur
edhi
shouse,whi
chi
swor
th80,
000bi
rragai
nstf
ir
e
i
nsur
ersX,Y,andZf
or60,
000bi
rr
,40,
000bi
rr
,and20,
000bi
rrr
espect
ivel
y.At
oKebede’
s
housewascompl
etel
ydest
roy
edbyaf
ir
ecausedbyAt
oAl
emu’
snegl
i
gence.Theamountof
i
ndemni
tyt
hatAt
oKebedewi
l
lbeent
it
ledt
orecei
vewoul
dbe80,
000bi
rr
,thev
alueoft
he
act
uall
ossort
heamountofi
nsur
ancecar
ri
ed.Theamountt
hateachi
nsur
eri
sent
it
ledt
o
cont
ri
but
ewoul
dbeasf
oll
ows:

7
Tot
ali
ndemni
ty=80,
000

Thus,
thepr
inci
pleofi
ndemni
tyi
smai
ntai
ned.

4.
5Pr i
ncipl
eofUtmostGoodFai th
I
nsurancecontractsar ebasedonmut ualtr
ust.Thismeans,bot htheinsuredandt heinsurer
mustmakef ul
ldisclosureofmat eri
alfact
st hathavebeari
ngont heassessmentoft herisk.
I
ntenti
onalconceal ment,mi srepr
esentati
onandf raudmayl eadt otheav oidanceoft he
i
nsurancecontract.Thei nsuredisboundt ogivethef act
sf orthequestionsposedbyt he
i
nsurer.However,insured’smaynotgi veinformati
ononcer tai
naspect sunlessaskedbyt he
i
nsurer

I
nsur
ancecont r
act
sarebaseduponreci
procat
edtrustandconfi
dencebet
weent
heinsur
er
andtheinsured.Thi
spr i
nci
plei
mposesahi gherstandar
dofhonestyonparti
estoan
i
nsur
anceagreementthanisi
mposedi
nordinar
ycommer ci
alcont
ract
s.

Thepr i
nci
pleofut mostgoodf aithissupportedbyt hr
eei mpor tantpolicies:representati
ons,
concealmentandwar rantees.
Represent
ations:ar estatement smadebyt heappl i
cantf orinsur ance.Forexampl e,ify ou
applyforli
fei nsurance,y oumaybeaskedquest ionsconcer ningy ourage,wei ght,height
occupati
on,st ateofheal th,f ami lyhist
ory,andotherr elevantquest i
ons.Youranswer st o
thesequestionsar ecalledr epr esentati
ons.Thelegalsi gnif
icanceofr epr esentati
oni sthat
theinsur
ancecont r
actisv oidabl eattheoptionoftheinsur er
’sift herepresent at
ionis:
 Mat eri
al,
 False, and
 Rel ieduponbyt hei nsurer.
Forexampl e,Ahmedappl iesf orinsuranceandst atesi nt heappl i
cati
ont hathehasnot

8
 vi
sitedadoct orwi t
hinthel ast5y ears.Howev er,sixmont hsear li
er,hehadsur geryforl ung
cancer .Int hiscase,hehasmadeast atementt hati sf alse,mat eri
alandr el
i
edonbyt he
i
nsur er.Ther eforethepol icyisv oidabl eatt heinsur er’
sopt ion.
Conceal ment :
- Conceal ment i s def ined as si l
ence when obl igat ed t o speak.Conceal ment has
appr oximat elythesamel egalef fectasami srepresent ationofamat eri
alfact.Itist he
fail
ur eofanappl i
cantt orev eal afactthati smat eri
al tot her isk.
- Conceal menti sintent i
onalf ai lureoft heappl icantf ori nsur ancet orev ealamat erialf act
tot heinsur er.
War rantees:
- Awar r
ant yisacl ausei nani nsur ancecont racthol dingt hatbef orethei nsurerisli
abl e,a
certainf act ,conditi
on,orci r cumst anceaf f
ect i
ngt her iskmustexi st.Forexampl e,a
mar i
ne insur ance cont ractmayst ate,“War ranted f ree ofcapt ure orsei zure.”Thi s
statementmeanst hati ftheshi pisi nvolvedi nawarski rmi sh,theinsur anceisv oi
d.Ora
bankmaybei nsuredoncondi tiont hatacer tainbur glaral arm sy stem bei nstall
edand
mai ntained.Suchacl ausei scondi t
ionpr ecedentandact sasawar r
ant y.
- A war rantycr eatesacondi tionoft hecont ract,andanybr eachofwar rant
y,ev eni f
i
mmat erialwillvoidt hecont ract .Thi sist hecent raldi stinctionbet weenawar r
ant yand
repr esentation.Ami srepresent ati
ondoesnotv oi
dt hei nsur anceunl essi tismat erialt o
ther i
sk,whi l
eundercommonl awanybr eachofwar ranty ,eveni fheldt obemi nor ,voi ds
thecont ract.

Requi
rementofani
nsurancecont
ract
A contr
actisanagreementembody ingasetofpr
omi
sest
hatar
elegal
l
yenf
orceabl
e.
I
nsur
ancepol
i
ciesar
econt
ract
sand,assuch,mustcompl
ywi
tht
heel
ement
srequi
redof
v
ali
dcont
ract
s.Tobel
egal
l
yenf
orceabl
e,ani
nsur
ancecont
ractmustmeetf
ourbasi
c
r
equi
rement
s.Thesear
e:-
. Of
i ferandaccept
ance:t
hef
ir
str
equi
rementofbi
ndi
ngi
nsur
ancecont
racti
sthatt
her
e
mustbeanof
ferandaccept
anceofi
tst
erms.I
nmostcases,
theappl
i
cantf
ori
nsur
ance
makest
heof
fer
,andt
hecompanyaccept
sorr
eject
stheof
fer
.
. Consi
i
i der
ati
on:r
efer
stot
hev
aluet
hateachpar
tygi
vest
otheot
her
.Theconsi
der
ati
on
r
equi
rementmeanst
hateachpar
tyt
otheagr
eementmustexchangesomet
hingofv
alue.
Thei
nsur
ed’
sconsi
der
ati
oni
spay
mentoft
hef
ir
stpr
emi
um (
orapr
omi
set
opayt
hef
ir
st

9
 pr
emi
um)pl
usanagr
eementt
o abi
debyt
hecondi
ti
onspeci
fi
edi
nthepol
i
cy.The
i
nsur
er’
sconsi
der
ati
oni
sthepr
omi
set
odocer
tai
nthi
ngsspeci
fi
edi
nthecont
ract
.Thi
s
i
ncl
udespay
ingf
ort
hel
ossf
rom ani
nsur
edper
il
,pr
ovi
dingcer
tai
nser
vices,
suchasl
oss
pr
event
ionandsaf
etyser
vices,
ordef
endi
ngt
hei
nsur
ed’
sinl
i
abi
l
ityl
awsui
ts.
i
i
i. Compet
entpar
ti
es:i
tmeanst
hateachpar
tyt
othecont
ractmustbecompet
ent
.I.
ethe
par
tesmusthav
i elegalcapaci
tyt
oent
eri
ntobi
ndi
ngcont
ract
.E.
g.mi
nor
s,i
nsane
per
sons,i
ntoxi
cat
edper
sonsandor
gani
zat
iont
hatactoutoft
hei
rchar
ter
s,by
laws,or
ar
ti
clesof
fincor
por
ati
oncannotent
eri
ntoenf
orceabl
econt
ract
s.
i
v. Legalpur
pose:t
hismeanst
hei
nsur
ancemustbef
orl
egalpur
pose.Acont
racti
nwhi
ch
onepar
tyagr
eedt
ocommi
tmur
derf
orspeci
fi
edamountwoul
dbeunenf
orceabl
eincour
t
becausei
tsobj
ecti
snotl
egal
.Fori
nsur
ancepol
i
cies,t
hisr
equi
rementmeanst
hatt
he
cont
ractmustbenei
therv
iol
atet
her
equi
rementofi
nsur
abl
eint
erestnorpr
otector
encour
agei
l
legal
vent
ures.

DI
STI
NCTLEGALCHARACTERI
STI
CSOFI
NSURANCECONTRACTSI
nsur
ancecont
ract
s
hav
edi
sti
nctl
egalchar
act
eri
sti
cst
hatmaket
hem di
ff
erentf
rom ot
herl
egalcont
ract
s.
Sev
eraldi
sti
nctl
egalchar
act
eri
sti
csofi
nsur
ancecont
ract
shav
eal
readybeendi
scussed.
As st
ated ear
li
er,mostpr
oper
tyand l
i
abi
l
ityi
nsur
ance cont
ract
s ar
e cont
ract
s of
i
ndemni
ty;al
linsur
ancecont
ract
smustbesuppor
ted byan i
nsur
abl
eint
erest
;and
i
nsur
ancecont
ract
sar
ebasedonut
mostgoodf
ait
h.Ot
herdi
sti
nctl
egalchar
act
eri
sti
cs
ar
easf
oll
ows:
1.I
nsur
ancei
sa per
sonalcont
ract
:In pr
oper
tyi
nsur
ance,i
nsur
ancei
sa per
sonal
cont
ract
.Thi
smeanst
hecont
racti
sbet
weent
hei
nsur
edandt
hei
nsur
er.St
ri
ctl
y
speaki
ng,apr
oper
tyi
nsur
ancecont
ractdoesnoti
nsur
epr
oper
ty,buti
nsur
est
he
ownerofpr
oper
tyagai
nstl
oss.
Theowneroft
hei
nsur
edpr
oper
tyi
sindemni
fi
edi
fthepr
oper
tyi
sdamagedordest
roy
ed.
Si
ncet
hecont
racti
sper
sonal
,theappl
i
cantf
ori
nsur
ancemustbeaccept
abl
etot
he
i
nsur
erandmustmeetcer
tai
nunder
wri
ti
ngst
andar
dsr
egar
dingchar
act
er,mor
als,and
cr
edi
t.Si
nceapr
oper
tyi
nsur
ancecont
racti
saper
sonalcont
ract
,itnor
mal
l
ycannotbe
assi
gnedt
oanot
herpar
tywi
thoutt
hei
nsur
er’
sconsent
.Ifpr
oper
tyi
ssol
dtoanot
her

10
per
son,t
henewownermaynotbeaccept
abl
etot
hei
nsur
er.Thus,t
hei
nsur
er’
sconsent
i
snor
mal
l
yrequi
redbef
oret
hepol
i
cycanbev
ali
dlyassi
gnedt
oanot
herpar
ty;
incont
rast
,
al
i
fei
nsur
ancepol
i
cyi
snotaper
sonalcont
ract
.Ther
efor
e,i
tcanbef
reel
yassi
gnedt
o
any
onewi
thoutt
hei
nsur
er’
sconsent
.
Thel
osspay
mentcan,howev
er,bef
reel
yassi
gnedt
oanot
herpar
tywi
thoutt
hepr
oper
ty
i
nsur
er’
sconsent
.Al
thought
hei
nsur
er’
sconsenti
snotr
equi
red,
thecont
ractmayr
equi
re
t
hatt
hei
nsur
erbenot
if
iedt
heassi
gnmentoft
hepr
oceedst
oanot
herpar
ty.
2.Uni
l
ater
alcont
ract
:Auni
l
ater
alcont
ractmeanst
hatonl
yonepar
tymakesal
egal
l
y
enf
orceabl
e pr
omi
se.I
nthi
scase,onl
ythe i
nsur
ermakesa l
egal
l
yenf
orceabl
e
pr
omi
set
opayacl
aim orpr
ovi
deot
herser
vicest
othei
nsur
ed.Thet
erm“
Uni
l
ater
al”
meanst
hatcour
tswi
l
lenf
orcet
hecont
racti
nonedi
rect
iononl
y:agai
nstoneoft
he
par
ti
es;i
nthi
scase,
thei
nsur
er.Af
tert
hei
nsur
edhaspai
dthepr
emi
um f
orcov
erage,
t
hei
nsur
ed’
spar
toft
heagr
eementhasbeenf
ulf
il
led.Undert
heseci
rcumst
ances,
the
onl
ypar
tywhosepr
omi
sesar
est
il
lout
standi
ngi
sthei
nsur
er.Al
thought
hei
nsur
ed
mustcont
inuet
opayt
hepr
emi
um t
orecei
vepay
mentf
oral
oss,
heorshecannotbe
l
egal
l
yfor
cedt
odoso.Howev
er,i
fthepr
emi
umsar
epai
d,t
hei
nsur
ermustaccept
t
hem andmustcont
inuet
opr
ovi
det
hepr
otect
ionpr
omi
sedundert
hecont
ract
.
I
ncont
rast
,mostcommer
cialcont
ract
sar
ebi
l
ater
ali
nnat
ure.Eachpar
tymakesal
egal
l
y
enf
orceabl
epr
omi
set
otheot
herpar
ty.I
fonepar
tyf
ail
stoper
for
m,t
heot
herpar
tycan
i
nsi
stonper
for
manceorcansuef
ordamagesbecauseoft
hebr
eachofcont
ract
.
3.Condi
ti
onalcont
ract
:Ani
nsur
ancecont
racti
sacondi
ti
onalcont
ract
.Thi
smeanst
he
i
nsur
er’
sobl
i
gat
iont
opayacl
aim dependsonwhet
herornott
hei
nsur
edort
he
benef
ici
aryhascompl
i
edwi
thal
lpol
i
cycondi
ti
ons.I
fthei
nsur
eddoesnotadher
eto
t
hecondi
ti
onsoft
hecont
ract
,pay
menti
snotmadeev
ent
houghani
nsur
edper
il
causesal
oss.Condi
ti
onsar
epr
ovi
sionsi
nser
tedi
nthepol
i
cyt
hatqual
i
fyorpl
ace
l
i
mit
ati
onsont
hei
nsur
er’
spr
omi
set
oper
for
m.
Thecondi
ti
onssect
ioni
mposescer
tai
ndut
iesont
hei
nsur
edi
fheorshewi
shest
o
col
l
ectf
oral
oss.Al
thought
hei
nsur
edi
snotcompel
l
edt
oabi
debyt
hepol
i
cycondi
ti
ons,
heorshemustdosoi
nor
dert
ocol
l
ectf
oral
oss.Thei
nsur
eri
snotobl
i
gat
edt
opaya
cl
aimi
fthepol
i
cycondi
ti
onsar
enotmet
.Ty
pical
condi
ti
onsi
ncl
udepay
mentofpr
emi
um,

11
pr
ovi
dingadequat
epr
oofofl
oss,
andgi
vi
ngi
mmedi
atenot
icet
othei
nsur
erofal
oss.
Forexampl
e,underahomeowner
’spol
i
cy,
thei
nsur
edmustgi
vei
mmedi
atenot
iceofl
oss.
I
fthei
nsur
eddel
aysf
oranunr
easonabl
eper
iodi
nrepor
ti
ngt
hel
oss,t
hecompanycan
r
efuset
opayt
hecl
aim ont
hegr
oundst
hatapol
i
cycondi
ti
onhasbeenv
iol
ated.

4.Al
eat
orycont
ract
:Ani
nsur
ancecont
racti
sal
eat
oryr
athert
hancommut
ati
ve.An
al
eat
orycont
racti
sonei
nwhi
cht
hev
aluesexchangedar
enotequal
.Dependi
ngon
chance,
onepar
tymayr
ecei
veav
alueoutofpr
opor
ti
ont
othev
aluet
hati
sgi
ven.For
exampl
e,assumet
hatEdi
thpay
sapr
emi
um of$500f
or$100,
000ofhomeowner
s
i
nsur
anceonherhome.I
fthehomewer
etot
all
ydest
roy
edbyf
ir
eshor
tl
yther
eaf
ter
,
shewoul
dcol
l
ectanamountt
hatgr
eat
lyexceedst
hepr
emi
um pai
d.Ont
heot
her
hand,
ahomeownermayf
ait
hful
l
ypaypr
emi
umsf
ormanyy
ear
sandnev
erhav
eal
oss.
I
ncont
rast
,ot
hercommer
cialcont
ract
sar
ecommut
ati
ve.Acommut
ati
vecont
racti
sone
i
nwhi
cht
hev
aluesexchangedbybot
hpar
ti
esar
etheor
eti
cal
l
yev
en.Forexampl
e,t
he
pur
chaserofr
ealest
atenor
mal
l
ypay
sapr
icet
hati
svi
ewedt
obeequalt
othev
alueof
t
hepr
oper
ty.Al
thought
heessenceofanal
eat
orycont
racti
schance,
ort
heoccur
renceof
somef
ort
uit
ousev
ent
,ani
nsur
ancecont
racti
snotagambl
i
ng cont
ract
.Gambl
i
ng
cr
eat
esanew specul
ati
ver
iskt
hatdi
d notexi
stbef
oret
het
ransact
ion.I
nsur
ance,
howev
er,i
sat
echni
quef
orhandl
i
nganal
readyexi
sti
ngpur
eri
sk.Thus,al
thoughbot
h
gambl
i
ngandi
nsur
ancear
eal
eat
oryi
nnat
ure,ani
nsur
ancecont
racti
snotagambl
i
ng
cont
ractsi
ncenonewr
iski
scr
eat
ed.

Cont
ractofAdhesi
on:Acont
ractofadhesi
onmeanst
hei
nsur
edmustacceptt
heent
ir
e
cont
ract
,wi
thal
lofi
tst
ermsandcondi
ti
ons.Thei
nsur
erdr
aft
sandpr
int
sthepol
i
cy,
and
t
hei
nsur
edgener
all
ymustacceptt
heent
ir
edocumentandcannoti
nsi
stt
hatcer
tai
n
pr
ovi
si
onsbeaddedordel
etedort
hecont
ractr
ewr
it
tent
osui
tthei
nsur
ed.Al
thought
he
cont
ractcanbeal
ter
edbyt
headdi
ti
onofendor
sement
sorf
orms,
theendor
sement
sand
f
ormsar
edr
aft
edbyt
hei
nsur
er.Howev
er,
tor
edr
esst
hei
mbal
ancet
hatexi
stsi
nsucha
si
tuat
ion,t
hecour
tshav
erul
edt
hatanyambi
gui
ti
esoruncer
tai
nti
esi
nthecont
ractar
e
const
ruedagai
nstt
hei
nsur
er.I
fthepol
i
cyi
sambi
guous,t
hei
nsur
edget
sthebenef
itof

12
t
hedoubt

13