Elements Of A Legal Insurance Contract

Offer and Acceptance

The applicant makes the offer to the insurance company.  The company may accept the risk, decline or ask for another offer (as in requesting additional premium).

Consideration (Premium)

Consideration refers to the statements made in the application plus the premium.


·      If no premium is collected when an application is taken, there is no coverage if a loss occurs.

·      If no premium is collected when an application is taken and the insurer agrees to issue a policy, coverage will be conditioned on the collection of premium.  The date of the execution of contract will be the date the premium is paid if all of the other requirements have been met.

·      If any time has elapsed between the taking of an application and the premium payment, the insured must sign a statement of “continued good health” when the premium is paid.  This will become part of the contract.

·      If an agent collects no premium at the time of application and later discovers a deterioration of health when delivering the policy, the policy must not be delivered.  No premium should be collected and the policy should be returned to the company.


NOTE:  If premiums had been paid at the time of application, health changes after that would not affect the contract.


Competent Parties

All parties to a contract must have a legal capacity.  This includes age and mental state.  A person who is below legal age, is intoxicated or is mentally incompetent would lack the legal capacity to sign a contract.


Legal Purpose

A contract must have a legal purpose or subject.  A contract cannot be in violation of public policy.  It also means a contract cannot call for an illegal activity.




Contract of Adhesion

The insurance company writes the entire contract because of the highly specialized and technical language required.  Because the insured must accept or reject the contract, as written, it is referred to as a “take it or leave it” contract.


Equal value is not given in the contract.  A small premium may result in large benefits being paid.  By the same token, premiums may be paid and no benefits result.  Contracts that give approximately equal value, like a real estate contract, are called commutative contracts.

Personal Contract

A life or health insurance contract involves a person’s life and health rather than property.

Unilateral Contract

“Uni” means one.  This is a one-sided contract because only the insurance company can be legally forced to abide by the contract.  A policy owner is only promising to pay premiums and cannot be legally forced to do so.

Conditional Contract

A life and health contract is conditional because the company’s payment of a claim will depend upon the insured’s meeting certain conditions such as paying the premiums, furnishing proof of loss, etc.



Ambiguities in a Contract of Adhesion

Because the insurer writes the contract en totale, if there are disagreements in the language, the courts will favor the insured rather than the insurer.  The courts have ruled that an applicant may have reasonable expectations based on an agent’s promise or a company’s advertisement.  The courts may hold that the insurer is estopped (legally stopped) from denying a promise that an agent made to an applicant, even if the promise seems at odds with the contract.


Under a contract of indemnity, an insured is not entitled to recover more than the actual economic loss.

Utmost Good Faith

All parties to an insurance contract are expected to show utmost good faith.  All are under an obligation not to deceive or withhold material information that affects the contract.


An applicant is expected to give accurate information to the best of his or her knowledge and memory (representations).  An applicant should not give information that he or she knows is not accurate (misrepresentations).


A warranty is a statement that is absolutely and literally true.  Insurance companies give warranties; the law defines applicant statements as representations.

Concealment -

If the applicant fails to disclose a fact that would materially affect the contract, he or she is guilty of concealment.  A material fact would be any fact that would have caused the company to have declined the risk, issued the policy on a less favorable basis or charged a higher premium had the fact(s) been known.


Any effort to defraud an insurance company is grounds for the denial of a claim and the cancellation of the policy.


A waiver is exercised when a company gives up a right.  A waiver of premium is an example of a company giving up the right to collect the premium if the insured becomes disabled.


Any legal prohibition against an insurance company’s action or inaction is generally called an estoppel.  It would be issued by a court of authority with instructions for the company to “stop” failing to live up to the promises they had made in the contract.

Written by Admin on March 4, 2009 under Insurance Basics.


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