A contract has been defined as an agreement that includes the required form and purpose, legal consideration, mutual assent, competence of all parties, acceptance and offer. We have previously explained the elements that make a contract legally enforceable in our earlier write-ups.
Today, let’s discuss insurance as a conditional contract. We have already discussed the two elements of good faith and adhesion that are included in it. Valid insurance contracts have certain special characteristics. In addition to having all the necessary elements of a valid contract, insurance contracts have their own body of law and distinct features. They are similar to other contracts in many ways, so all insurance contracts should have all the necessary elements to be legally enforceable.
Conditional Contract.
Insurance policies are taken to cover specified perils or losses. An insurance policy is a conditional contract, where the payment of a claim by the insurer depends on whether a covered loss has occurred. The insured must fulfill certain obligations before a claim is paid, such as giving early notice to the insurer after a loss has occurred. However, this does not mean that the policy does not have any value during a specific policy period.
Why should he be obligated to pay an yearly fee while discussing motor insurance coverage with a potential policyholder who questions the necessity, even if he doesn’t file a claim? Imagine that the commitment is present, even if the insurer is not obliged to fulfill it throughout the duration of the policy. If a covered loss occurs, the insured receives the insurer’s commitment to provide compensation, making the purchase of an insurance policy a valuable agreement.
Contracts of insurance encompass the exchange of money for the protection upon the occurrence of certain or uncertain events, involving amounts that are not equal and fortuitous. The insurer expects to pay its share of the total amount based on the proportionate premium reflected in each policy, which all insureds with similar policies are obliged to honor. Prospective insureds need to understand that these agreements involve the exchange of money for certain events, similar to contracts that involve the delivery of goods or services, but are not insurance contracts.
Insurance transactions involve a fair trade where the insureds’ obligations are significantly higher than those of the insurer. In the event of a major loss, the insured may have to pay a substantially higher premium compared to the insurer’s claim payment. Conversely, when there are few or no regular losses, the amount paid by the insurer to the insured is lower than the premium paid for a specific policy. Insurance contracts also entail an exchange of unequal amounts.
For example, let’s consider a situation where an insurer charges an annual premium of GH¢1,000.00 to insure a valued car with motor comprehensive cover up to GH¢40,000.00.
In each of these instances, varying quantities are implicated unless the responsibilities of the insurer coincidentally amount to precisely GH¢1,000.00 in a minor collision. Nonetheless, it does not imply that policyholders who have no damages–or only exceedingly insignificant damages–do not receive the worth of their money or that policyholders engaged in significant accidents benefit from the insurance.
The insurer must ensure that the premium for a specific policy reflects the estimated losses that the insured’s share should cover. While some insureds have significant losses, many have none. The insurer expects to pay an amount that is proportionate to the insured’s share of the total premium, which reflects the agreements made with all insureds who have similar policies. Kindly follow and learn more about what sets special insurance contracts apart from other contracts.
The writer is a Chartered Insurer and an Associate of the Chartered Insurance Institute of United Kingdom and also Ghana (ACII-UK, ACIIG),.
Reference.
Exploring the Legal Terrain of Insurance, American Institute for Chartered Property and Casualty Underwriters. Edited by Martin J. Frappolli.
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