Legal Aspects of

Banking and Insurance

Syllabus - BBA-BI (PU)
POKHARA UNIVE RSI T Y
COURSE CODE NUM B E R – L AW 29 2
YE AR\SEME ST E R - I II /VI
CREDIT HOURS - 0 3 L E ARNING HOURS - 48
B ACHEL OR IN B USINE SS ADM INIST RATION- B I (BB A-B I)
 Unit V: Legal Framework of
Insurance
Insurance and the law of contract
general requirements of an enforceable contract;
 void and voidable;
special legal characteristics of insurance contract
insurance as a contract of indemnity,
insurance as a personal contract
insurance as a unilateral contract
insurance as a conditional contract
insurance as a contract of adhesion
insurance as a aleatory contract,
and insurance as a contract of utmost good faith.
What is meant by insurance law?
Definition of Insurance Law
Insurance is a contract in which one party (the "insured") pays money (called a premium) and
the other party promises to reimburse the first for certain types of losses (illness, property
damage, or death) if they occur.

Why is legal framework necessary?

“A legal framework with comprehensive laws and regulations, and less detail up for negotiation
in individual contracts, provides a stronger foundation upon which a country can manage its
extractive industries according to national priorities.”
Legal Framework
Legal frameworks comprise a set of documents that include the constitution, legislation,
regulations, and contracts. How these documents relate to one another, which has
more force than the other, is often referred to as a legal hierarchy, as illustrated in the
pyramid below.
The Legal
Hierarchy
Insurance and the law of contract
Contract law
In general, an insurance contract must meet four conditions in order to be legally valid:
it must be for a legal purpose;
the parties must have a legal capacity to contract;
there must be evidence of a meeting of minds between the insurer and the insured;
and there must be a payment or consideration.
Insurance and the law of contract
To meet the requirement of legal purpose, the insurance contract must be supported by an
insurable interest (see further discussion below); it may not be issued in such a way as to
encourage illegal ventures (as with marine insurance placed on a ship used to carry contraband).
The requirement of capacity to contract usually means that the individual obtaining insurance
must be of a minimum age and must be legally competent; the contract will not hold if the
insured is found to be insane or intoxicated or if the insured is a corporation operating outside
the scope of its authority as defined in its charter, bylaws, or articles of incorporation.
 Insurance and the law of contract
The requirement of meeting of minds is met when a valid offer is made by one party and accepted by another.
The offer is generally made on a written application for insurance. In the field of property and liability
insurance, the agent generally has the right to accept the insured’s offer for coverage and bind the contract
immediately. In the field of life insurance, the agent generally does not have this power, and the contract is not
valid until the home office of the insurer has examined the application and has returned it to the insured
through the agent.
The payment or consideration is generally made up of two parts—the premiums and the promise to adhere to
all conditions stated in the contract. These may include, for example, a warranty that the insured will take
certain loss-prevention measures in the care and preservation of the covered property.
 General requirements of an enforceable
contract
For a legally binding contract to exist, six constituent elements must be present. The six elements are offer,
acceptance, consideration, intention, capacity, and legality (note that there are eight elements to an
insurance contract, the additional elements being insurable interest and utmost good faith).
Where one or more of these elements is lacking, an enforceable contractual agreement fails to exist and a
legal action to compel compliance, or obtain compensation, for breach of this non-contract shall be
unsuccessful.
1. Offer
An offer is the tentative promise that begins contractual negotiations. It is when one party to a contract initiates
and indicates a desire to enter into a relationship with another party. An offer may be made in writing, spoken
words, or simply by conduct (such as a man who waves to hail a taxi cab is making an offer to procure
transportation services). It is also interesting to note that merely extending an invitation to enter into a contract
fails to amount to an offer. A store publishing a catalogue of products with prices is inviting offers to buy rather
than making an offer to sell. This view of what amounts to an offer is necessary to prevent a retailer from being
at risk of 'breach of contract' should too many people wish to purchase products that may in limited supply.
2. Acceptance
When an offer is made, acceptance of the offer generally requires positive conduct meaning that the acceptance
is deemed only to have occurred when the accepting party acts in some way or form that confirms acceptance.
The offering party must avoid making an offer that requires the other party to reject the offer or be bound;
however, an exception does exist where the parties have an established relationship with an agreement that
silence following an offer shall be deemed as acceptance.
3. Consideration
Consideration as an element to a legally binding contract is without the same meaning as the word consideration
in common language. While giving careful thought, being the common language meaning of the word
consideration, is prudent in contractual negotiations, the word consideration as it applies to contract law means
the existence of a value for value exchange between the parties to a contract. The value exchanged may be
tangible such as goods for money, or intangible such as a service for service. Even a promise may be valid
consideration such as the promise of an insurance company to provide financial protection against the possibility
of a future peril.
4. Intention, ad idem (meeting of the minds)
The element of intention involves a genuine desire to establish legal relations. Where a reasonable bystander
listening to negotiations would fail to perceive sincerity among one or more of the parties, formation of a
contract has failed; and accordingly, the element of intention requires an objective rather than subjective review
as was confirmed in, among others, the case of West End Tree Service Inc. v. Danuta Stabryla, 2010 ONSC 68
where it was said: A common example of a lack of intention would involve braggarts. If one friend were to say
to another, "I will pay you a million dollars if you can throw this rock, and hit that tree, from one hundred feet
away, while blindfolded", and the friend incredibly but successfully actually performs the feat, the obligation to
pay a million dollars is avoided due to a lack of genuine intention; however, the promise to pay a prize or reward
for the performance of feats of chance or skill may be legally binding in many circumstances (
as it is with participants in a genuine contest).
5. Capacity
Some parties may attempt to enter into a contract without having capacity to do so. Minors, with some
exceptions, as well as persons of unsound mind are commonly recognized examples.
An unregistered business is merely a purported entity without actual legal status and is without capacity to enter
into legally binding contracts. Where contracts are purportedly made and subsequently discovered to involve a
non-entity this may prove costly. A person who represents himself or herself as acting on behalf of an entity
without actual legal status may adversely find himself or herself individually and personally responsible for
fulfilling the obligations of the contract. Additionally, it is important that persons and genuine businesses ensure
where others purport to act on behalf of an entity that the entity legally exists prior to entering into a contract
with the entity.
6. Legality
A contract must have a legal purpose and object to be enforceable. An agreement between thieves to split the
proceeds of a robbery on a 50/50 basis will be ignored by the civil courts should a dispute arise (although the
criminal courts may be interested in prosecuting their crimes). Of course, legality as an element of a contract
may be more complicated, and less obvious, than as shown above. For example, an employer and employee
may choose to sign a document purporting as a contract whereby the employee agrees to waive rights to the
worker injury compensation protection afforded by the Workplace Safety and Insurance Act ("WSIA"); however,
as the WSIA declares such agreements unlawful, the contract, or at least the waiver term within the contract,
shall be null and void. Another example involves the Limitations Act whereby parties are forbidden from
contractually amending the limitation period during which litigation may be commenced.
 void and voidable
The difference between void and voidable contracts Is that a void contract is illegal and unenforceable while a voidable contract is legal and
the parties can enforce it. A void contract is invalid or entirely against the law, so no one involved can say it's enforceable under the law.

What Does Void Mean?

Contracts that are void mean they cannot be enforced by either party. Essentially, it’s a contract that is no longer able to be used, and the
courts will look at it like there was never a contract to begin with. One issue that can lead to a contract being void is the subject matter of the
contract being illegal in the particular state or throughout the country. Depending on the terms, and what aspect was illegal, one or both
parties could be facing criminal charges.

What Does Voidable Mean?

With a voidable contract, one party can be bound by the contract terms while the other party has the right to change their mind. In other
words, they can cancel the contract whenever they want. Another situation that could render a contract voidable is mutual mistake or when
important material is missing from the contract.
An example of a voidable contract is one involving a minor. Minors can enter into contracts, but they can also decide to breach the terms
without legal repercussions. There are other parties who cannot enter into a legally binding contract either, including someone who lacks the
mental capacity or is intoxicated or on drugs at the time the contract was drafted.
Main Differences Between Void and Voidable
With a void contract, it’s invalid from the very start. It doesn’t require one party to back out or challenge its
validity. In this case, neither party can enforce a void contract since it’s viewed as though the contract never
existed. With a voidable contract, it doesn’t become invalid until one party asserts a legal reason for canceling
or revoking it. This means without one party raising a legal objection, the contract would remain valid.
Contracts that are no longer enforceable become void. If one party uses a tactic like fraud or coercion, the
contract will become voidable as well. With a void contract, the contract can’t become valid just by both parties
agreeing, as you can’t commit to doing something illegal. Voidable contracts can be made valid if the party who
isn’t bound agrees to give up their rights to rescission.
Examples of void contracts could include prostitution or gambling. If someone enters into a contract and is
suffering from a serious illness or was mentally incompetent, it would be void because the party lacked legal
capacity to enter into a contract.
 Distinct Legal Characteristics of
Insurance Contracts
In general, an insurance contract must meet four conditions in order to be legally valid: it must be for a legal
purpose; the parties must have a legal capacity to contract; there must be evidence of a meeting of minds between
the insurer and the insured; and there must be a payment or consideration.
Insurance contracts have distinct legal characteristics that make them different from other legal contracts. Several
distinctive legal characteristics have already been discussed. As we noted earlier, most property and casualty
insurance contracts are contracts of indemnity; all insurance contracts must be supported by an insurable interest;
and insurance contracts are based on utmost good faith. Other distinct legal characteristics include the following:
Aleatory contract
Unilateral contract
Conditional contract
Personal contract
Contract of adhesion
 Contract of Indemnity
Meaning of Contract of Indemnity
Contract of indemnity meaning is a special kind of contract. The term indemnity literally means security or protection against a
loss or compensation.
A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or
by the conduct of any other person, is called a contract of indemnity.
Objective of Contract of Indemnity
The objective of entering into a contract of indemnity is to protect the promisee against unanticipated losses.

Parties To The Contract of Indemnity

A contract of indemnity has two parties. The promisor or indemnifier
The promisee or the indemnified or indemnity-holder
The promisor or indemnifier: He is the person who promises to bear the loss.
The promisee or the indemnified or indemnity-holder: He is the person whose loss is covered or who are compensated.
In the above-stated example,

P is the indemnifier or promisor as he promises to bear the loss of Q.Q is the promisee or the indemnified or indemnity-holder as
his loss is covered by P.
Aleatory
If one party to a contract might receive considerably more in value than he or she gives up under the terms of
the agreement, the contract is said to be aleatory. Insurance contracts are of this type because, depending
upon chance or any number of uncertain outcomes, the insured (or his or her beneficiaries) may receive
substantially more in claim proceeds than was paid to the insurance company in premium dollars. On the other
hand, the insurer could ultimately receive significantly more dollars than the insured party if a claim is never
filed.
Adhesion
In a contract of adhesion, one party draws up the contract in its entirety and presents it to the other party on a
'take it or leave it' basis; the receiving party does not have the option of negotiating, revising, or deleting any
part or provision of the document. Insurance contracts are of this type, because the insurer writes the contract
and the insured either 'adheres' to it or is denied coverage. In a court of law, when legal determinations must
be made because of ambiguity in a contract of adhesion, the court will render its interpretation against the
party that wrote the contract. Typically, the court will grant any reasonable expectation on the part of the
insured (or his or her beneficiaries) arising from an insurer-prepared contract.
Utmost Good Faith
Although all contracts ideally should be executed in good faith, insurance contracts are held to an even higher
standard, requiring the utmost of this quality between the parties. Due to the nature of an insurance
agreement, each party needs - and is legally entitled - to rely upon the representations and declarations of the
other. Each party must have a reasonable expectation that the other party is not attempting to defraud,
mislead, or conceal information and is indeed conducting themselves in good faith. In a contract of utmost
good faith, each party has a duty to reveal all material information (that is, information that would likely
influence a party's decision to either enter into or decline the contract), and if any such data is not disclosed,
the other party will usually have the right to void the agreement.
Executory
An executory contract is one in which the covenants of one or more parties to the contract remain partially or
completely unfulfilled. Insurance contracts necessarily fall under this strict definition; of course, it's stated in
the insurance and agreement that the insurer will only perform its obligation after certain events take place (in
other words, losses occur).
Unilateral
A contract may either be bilateral or unilateral. In a bilateral contract, each party exchanges a promise for a
promise. However, in a unilateral contract, the promise of one party is exchanged for a specific act of the other
party. Insurance contracts are unilateral; the insured performs the act of paying the policy premium, and the
insurer promises to reimburse the insured for any covered losses that may occur. It must be noted that once
the insured has paid the policy premium, nothing else is required on his or her part; no other promises of
performance were made. Only the insurer has covenanted any further action, and only the insurer can be held
liable for breach of contract.
Conditional
A condition is a provision of a contract which limits the rights provided by the contract. In addition to being
executory, aleatory, adhesive, and of the utmost good faith, insurance contracts are also conditional. Even
when a loss is suffered, certain conditions must be met before the contract can be legally enforced. For
example, the insured individual or beneficiary must satisfy the condition of submitting to the insurance
company sufficient proof of loss, or prove that he or she has an insurable interest in the person insured.
Personal contract
Insurance contracts are usually personal agreements between the insurance company and the insured
individual, and are not transferable to another person without the insurer's consent. (Life insurance and some
maritime insurance policies are notable exceptions to this standard.) As an illustration, if the owner of a car
sells the vehicle and no provision is made for the buyer to continue the existing car insurance (which, in
actuality, would simply be the writing of the new policy), then coverage will cease with the transfer of title to
the new owner.