The Characteristics of Insurance Contracts

 An insurance contract is a legal agreement between the insurance company and the
policyholder. As with all contracts, insurance policies outline the duties and obligations to which
each party must adhere. Insurance contracts have certain characteristics in common with other
types of contracts.

Unilateral

 An insurance contract is a unilateral contract, which means that a promise to perform is

exchanged for a specific act. In an insurance policy, the insurer promises to pay benefits for a
covered policy occurrence. In exchange, the policyholder agrees to pay the premium. If the
policyholder discontinues premium payments, coverage will end but no further obligation is
required of the policyholder.

Adhesion

 Insurance policies are contracts of adhesion, which means that the policyholder agrees to
accept the terms of the policy as offered. This differs from business contracts where each party
has the option to negotiate terms until an agreement is reached. This serves to favor the
policyholder, because in a court dispute over ambiguous contract terms, courts favor the party
who did not write the contract.

Conditions

 Insurance policies include conditions that must be met before the terms of the policy can be
enforced. One type of condition is a condition precedent, such as a car accident needing to occur
before a claim can be opened. A condition antecedent occurs after the fact, such as the
policyholder being required to report the accident to the insurance company within a specified time
period.

Aleatory

 An aleatory contract is one where one party stands to gain more than the other. For example,
in the case of a $100,000 life insurance policy, if the policyholder dies a month after the policy is
taken out, the beneficiary will receive the entire $100,000 from the insurance company even
though the premiums paid to this point would be only a fraction of that amount.

Good Faith

 All parties that enter into an insurance contract are required to act in good faith. They must not
conceal, misrepresent or attempt to defraud. For example, if a policyholder misrepresents his
home address to obtain lower auto insurance premiums, the insurance company may have
grounds to deny a claim or void the contract

Insurance Contract Requirements

 An insurance policy is a legal contract that is agreed upon by two or more parties. The purpose
of insurance is to indemnify you, or to bring you back to the same financial position you were in
before you suffered the covered loss. Since insurance can have major financial implications,
certain guidelines exist to make an insurance agreement valid.

Insurable Interest

 You have a right to insure anything for which you have an insurable interest. An insurable
interest exists when loss of the item being insured will cause a significant financial setback or
hardship, or create a legal liability. For example, you might pay hundreds of thousands of dollars
for your home, therefore the monetary investment in the home is an insurable interest to you.

Consideration

 Each party to the insurance contract, typically you and the insurance company, must have
considerations in the policy. This is what determines the value each party brings to the contract.
For you, the consideration is the premiums paid throughout the contract term. For the insurance
company, it is the potential money paid to you when you file a claim.

Legal Capacity

 The insurance agreement must be made between two competent and legal parties. If you are a
minor, or if someone else is legally responsible for your decisions due to a mental illness or
restriction, you are not eligible to enter into an insurance contract by yourself. You do not have the
legal capacity to make this agreement.

Meeting of the Minds

 Sometimes called the doctrine of "utmost good faith," the meeting of the minds means that
each party to the contract agrees to be honest with the other and gives personal attention to the
details of the contract. In good faith you agree not to misrepresent material information to the
insurer and it agrees not to unfairly cancel your contract as a result.

Offer And Acceptance

 In order for the contract to be valid, you must make an offer to buy an insurance policy through a signed
or electronic application accompanied by an appropriate premium, and the insurance company must accept
your offer by issuing the policy. The contract is not valid without this step, even if the other factors exist.

What Are The Types of Insurance?

Insurance contracts are financial products that pool risk. This article should give a good summary of some of the
major risks an individual faces and the appropriate insurance contracts that address those risks.

Risk of Premature Death

1. Life insurance is a valuable tool that families and businesses use to prepare for the passing
of a loved one or business partner. There are different types of life insurance contracts that
have different intended uses, but what is important is that the amount of coverage is adequate
to provide financial security for those that survive the deceased.

Risk of Loss of Income Due to a Sickness or Injury

2. Disability income insurance contracts replace the income of a bread winner in the event that
the breadwinner can't work due to an illness or injury. It is said that the ability to earn an
income is one's greatest asset; this coverage protects that asset.

Risk of Damage to One's Home

3. Home owners insurance protects home owners from potential damage to their residences.
Home owner policies also provide funds for liabilities created on the premises of a homeowner.

Risk of Damage to an Automobile

 4. Auto insurance provides funds for the repair or replacement of a motor vehicle in the event
of an accident or other damage. These contracts also provide for the medical care of anyone
who is injured in an auto accident.

Risk of Outliving Your Money

5. Annuity contracts are issued by life insurance companies and offer annuitants guaranteed
income for life. The risk of outliving ones money is perhaps the greatest fear of retirees. This
insurance contract is the only way to address that risk.

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Legal Characteristics of an Insurance Contract
 insurance business offers peace of mind for a price. The consumer, called the "insured,"
contracts with the insurance company (the "insurer") for financial protection against some specific
loss (such as a home, car, or even life). If loss occurs (and if it is covered by the contract), the
insurer must reimburse the insured. Insurance contracts have common contract elements and a
few unique concepts.

Offer, Acceptance, Consideration

 Every insurance contract must have offer, acceptance, and consideration. Insurance
companies offer insurance services for a fee; consumers accept those services by writing a check
and sending it to the company. The services offered and the money paid form the consideration of
the contract. Like other contracts, parties must be competent to contract (which usually means that
the parties have reached the age of majority and are not mentally impaired).

Greater Protection Against Fraud and Untruthful Behavior

 Insurance contracts impose a duty of "utmost good faith" on the parties involved. Parties to any
contract must act in good faith (which typically means the parties will deal with each other fairly).
Insurance contracts, which involve intricate factual details about when an insured is entitled to
reimbursement and what information the insured must provide to the insurer, require a higher duty
than simply good faith. Utmost good faith means that the parties must declare every material detail
and deal fairly. Material information is any information that could have an impact on the party's
decision to enter into or decline the contract. An insured cannot hide the fact that he or she has
heart disease if applying for a health insurance contract; the insurer cannot hide facts relating to
how an insured can recover for loss.

Aleatory, Executory, Unilateral and Conditional

 Insurance contracts are unique because the insured pays the insurer for protection against
events that may or may not come to fruition. As such, insurance contracts are aleatory, executory,
unilateral and conditional. An aleatory contract means that one party may end up receiving more
value than what he or she paid for. The insurance company, for example, could reap profit from an
insured if the insured never files a claim (and keeps paying the premiums). Executory contracts
require a party to act if an event occurs. The insurance company does not pay on claims until
some event happens to the insured (such as a house fire). Insurance contracts are also unilateral:
The parties contract for specific acts, not promises to act. Lastly, insurance contracts are
conditional: Even if an event occurs triggering reimbursement, conditions to receive
reimbursement must be met (such as timely filing of a claim).
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