CHAPTER 7
INSURANCE CONTRACTS
CONTRACT TERMINOLOGY
A
CONTRACT is a legally binding
agreement creating rights and duities for
those who are parties to it.
 If one party to the contract fails to
perform its duties without a legal excuse,
the contract is said to be breached.
Courts can enforce thier judgements and
settle contractual disputes.
A VALID CONTRACT is one
court will enforce.
A VOIDABLE CONTRACT allows one party
the option of breaking the agreement
because of an act or omission of an act
by the other party.
 A VOID CONTRACT is pme a court will not
enforce because from its begining it laked
one or more features of a valid contract.

BINDER
 In
property insurance, a temporary
contract called a binder is often used
before isssuance of the formal insurance
policy.
 The
binder must meet all the requirements
for a legal contract.
BINDER
 30
DAYS OR LESS
 Purpose is to provide coverage during the
time it takes to process an application.
 Oral or written
 Parol evidence rule : written agreement
takes the precedence over oral
agreement.
CONDITIONAL RECEIPT
 Binders
are not used in life insurance
because life insurance agents lacks the
authority to bind their companies.
Temporary coverage, however,
contingent on an applicants ability to
present evidence of insurability can be
provided by a conditional receipt.
Coverage begins from the date of
receipt.
ELEMENTS OF A VALID
CONTRACT
OFFER AND ACCEPTANCE
 Deals
begin when one person makes a
proposal to exchange something of value
with another person.
 The proposal to make an exchange is
called OFFER. If the second person
agrees to the exchange, this is
ACCEPTANCE.
 The offer must be reasonably definite and
communicated clearly.
 There must be meetings of the minds.
 Insurer issues policy indicating an
accpetance to an offer.
CONSIDERATION
 The
value exchanged between the
parties to the contract is the
consideration.
 Consideration may take a tangible form
such as money, or it may take the form of
a promise to do something or not to do it.
 There must be an exchange of
consideration to have a valid contract.
CONSIDERATION



In an insurance contract, the consideration
the insurer is a contingent promise to pay the
insured.
Most insurance contracts are UNILATERAL
CONTRACTS. That is, only the insurer makes
an enforceable pay the promise. The insured
does not promise to pay the premiums and
cannot be sued for failure to do so.
Contracts in which both parties make
enforceable promises are called bilateral
contracts.
CAPACITY
 Not
every person legally has the capacity
to enter into a contract.
 As a general rule, for reasons of social
welfare, minors, the insane and the
intoxicated can not enter into a binding
agreement.
LEGAL PURPOSE
A
Contract must have a legal purpose, an
end or intention permitted by law
contracts having an antisocial purpose
are legally unenforceable.
 An insurance policy purchased as a
gamble on a famous person`s life or any
life in which the contract owner has no
legal interest is an example of an
unenforceable contract.
DISTINGUISHING
CHARACTERISTICS OF
INSURANCE CONTRACTS
PRINCIPLE OF INDEMNITY: it means the
insured should be in the same financial
position after as before the insured loss.
Exceptions
 Life Insurance
 Replacement-Cost Insurance
 Valued Insurance Policies
1.
SUBROGATION
 Is
the legal substitution of one person in
another`s place.
eg. If a person must pay a debt for which
another is liable, such payment should give
the person a right to collect the debt from
the liable party.
CONTRACT OF ADHESION
That is the unequal knowledge and
unequal bargaining power are perceived
to give the insurer a significant advantage
over the insured , most states classify
insurance contracts as contracts of
adhesion.( due to wording)
REPRESENTAION
 Before
entering insurance contracts
applicants are asked questions and if the
consumer give false answers then the
answers are material to the tisk, the insurer
can void the contract.
eg. Any accidents in past 3 years `no`
materiality-negative answer.
CONCELMENT
 Is
silence when obliged to speak or a
failure to disclose material information.
ENTIRE CONTRACT
 Any
statement made by applicant for life
insurance be attached to the policy.
INCONTESTABLE CLAUSE
 1-2
YEARS have the right to void.
THE ALETORY FEATURE
 ALETRORY
is gambling. Premium is the loss
of the insured when there is no loss
however, it is a gain for the insurer.
RECESION
 IS
AN AGREEMENT BY BOTH PARTIES TO
END THE CONTRACT.
REFORMED
 When
the contract is needed to be
written again due to typing mistakes.