What is Insurance Contract?

Insurance Contract

An Insurance Contract may be defined as an agreement between two parties whereby one party is called an insurer and the other is called insured.  The Insurer which is the Insurance Company undertakes, in exchange of fixed premium to pay the Insured fixed amount of money on the happening of a certain event.

As per the Insurance Act, 1938

Section 2(8) : ‘Insurance Company’ means any insurer being a company, association or partnership which may be wound up under 18 [the Companies Act, 1956 (1 of 1956)], or to which the Indian Partnership Act, 1932 (9 of 1932), applies;

Section 2(9) : ‘Insurer’ means any individual or unincorporated body of individuals or body corporate incorporated under the law of any country carrying on Insurance business.

Any Agreement can be termed as Contract if it has the essentials of a valid contract specified under the Contracts Act, 1872 i.e.

Offer and acceptance

The Offer for entering into contract generally comes from Insured.  In some cases offer comes from the Insurance Company also in the form of publication of prospectus, canvassing by Agents etc.  So, it is clear that Offer can come from both the sides.  The main element of acceptance should be there.  The Insured has to accept the payment of premium of the sum assured/insured and the Insurance Company has to agree to pay the compensation in the event of loss occurred to the Insured during the period of contract.  The insurance can be for Life or for property.

Consideration

Certain sum is charged as premium from the Insured and against the consideration, a large sum is guaranteed to be paid by the Insurer who received the premium. Insurance contracts are Unilateral contracts, where only the insurer makes legally enforceable promises to pay for covered losses.  The Company cannot sue the Insured for breach of contract.  However, Insurance contracts are also Conditional Contracts i.e. if the Insured fails to abide the contract, then the Insurer is not obligated to pay for any Insured’s losses.

Competenet parties:

The Section and Rules as applicable in case of General Contract Act, 1872 related to competent parties is applicable in case of Insurance Contract also.  Say for example, both the parties to the contract must have attained the age of Majority and the Minor cannot sign the Insurance Contract.  Both the parties should be of sound mind. 

Legal purpose

All contracts must have a legal purpose to be enforceable by the courts i.e. the objects are not forbidden by law or are not immoral or opposed to public policy.   If the object of Insurance, like the consideration, is found to be unlawful, the policy is said to be Void.

Now let us see some elements of insurance contract –

  • indemnity
  • insurable interest
  • utmost good faith
  • subrogation
  • assignment and nomination
  • warranties
  • proximate cause
  • return of premium.

It can be said that if any contract lacks any of these essential elements and other elements, then it is a Void Contract.  It is also to be noted that insurance companies often void a contract because the applicant’s i.e. the Insured provides wrong and false information. 

The Insurance Agreement should specify the risks that are covered, the limits of the Policy and the term of the policy.  Additionally all insurance contracts should specify: Conditions, Limitations and exclusions.  The Insurance policy can be for Life or for Property.

Generally the Insurance Company through the guidelines, terms and conditions in the Agreement Form frames the terms of the contracts.  Once the application is signed by the Insured it means that he has agreed to the terms and conditions in the contract and is bound by the same.  The Insurance Company should be very careful while framing the guidelines, terms and conditions in the agreement because there are no specific Act and differing legal definitions, rulings provided by different courts and different guidelines framed by the State Governments.  Therefore the insurance companies have to take utmost care in framing the words so that it can be legally effective and at the same time it must provide a wide range of coverage to the Insured.  Before signing the contract agreement, it is the duty of every Insured to go through these terms and conditions because the insurance contracts are not negotiable.  There are so many case laws which benefit the Insured. 

It is to be noted that all contracts except personal insurance are contracts of Indemnity and the principles laid down for Indemnity Contract is applicable to these contracts. According to  these principles, the Insurer indemnifies the insured for payment of the Insured sum at the occurrence of the event specified in the terms of the contract.  In such cases the Insured has to prove that.  The amount of compensation should be the actual value of the goods insured and if the Insured claims more than what is the actual value then the Insurance Company has the right to get the extra money back from the Insured.

Most insurance contracts, viz.  Policies for property, liability and health insurance are indemnity contracts, where insurance companies are required to compensate for the actual losses, up to the policy limits. However for policies like life insurance contracts, they will have to pay the face amount of the policy. An insured person if required to do few things, before and after the loss, and if he fails to perform those duties, or satisfy those conditions, then the insurance company need not be obligated to pay the claim amount, claiming that the insured has breached the contract of the policy. If breach is material, then the court can grant relief to the insured.

The condition precedent are

  • The insured has to notify the insurer of any loss that has occurred to him.
  • For property insurance, the insured has to provide inventory of losses.
  • For disability insurance, they have to provide proof of any kind of disability to the insurer.

Insurance policy contracts can be ended mutually, i.e. recession. However, if the insured fails to pay the insurance premium amount, the insurance company can file a case in court to cancel the insurance policy. But the life insurance policy has an incontestable clause which prevents life insurance for cancelling its policy after a period 1 to 2 years.  

“The views of the authors are personal

References

The Insurance Act, 1938

Indian Contracts Act, 1872