ELEMENTS AND ESSENTIAL FEATURES OF AN INSURANCE CONTRACT

ELEMENTS OF AN INSURANCE CONTRACT

A contract of insurance requires the presence of the following:

• Offer.
• Acceptance.
• Intention to create legal obligation.
• Legality of the object.
• Capacity to contract.

 

1) Offer: An offer comes from the insured. It is usually contained in the proposal form which is filled by the proposer and submitted to an insurer. However, it is not in all cases that an offer comes from the insured. There are situations where the offer comes from the insurer. This has been pointed out by a seasoned insurance law author and practitioner who said “An exception to the general principle that an offer is usually made by the prospective insured is in the respect of life assurance. Here the proposal constitutes an invitation to treat and not an offer. The offer is made when the insurance company communicates to the proposer its willingness to enter into a contract of life assurance and stating the terms of the proposed contract. It is immaterial that the insurer’s letter is described as an acceptance”.

This view can readily be supported because in life insurance, the proposer offer has to undergo a medical examination after completing a medical form, which may not have been mentioned in the proposal form. In the initial proposal form, the proposed insured is called an offer. The insurer would still be the final offer or because the requirement of medical examination will then be counter-offer which destroys the original offer and replaces it with fresh offer.

 

2) Acceptance: Just as the offer comes from the proposed insured in a straight-forwarded case, the acceptance comes from the insurer in a straight-forward situation. It has been shown in UNIC v Fedco that the completion of a contract of insurance need not be a complicated affair. Thus in that case, the letter written bythe insurer constituted the offer while the payment of N600 premium as requested by the insurer constituted the acceptance. Beyond that, there was nothing else to add or take away from the contract which had become binding.

In the Canning v Fanquher case, the deceased completed a proposal form for life insurance. The risk was considered and approved by the insurer, but the acceptance was made subject to the condition that “No assurance can take place until the first premium is paid”. Before the payment of the premium, the deceased fell over a cliff and suffered serious injuries. The premium was later tendered and the company was informed of the changed circumstance. The company refused to accept the premium. The man eventually died and his administrator sued the company, claiming that contract to insure had been made on the day the proposal was”accepted”.

It was unanimously held by the court of appeal that there was no contract before the premium was tendered. The change in the risk released the company from any obligation to accept the premium when tendered. Lord Esther said that the insurance company was not bound to accept premium as they had the right to say “the circumstances are altered, therefore will not insure”, even though, if circumstances had not been altered they would have been bound by the contract. The real reason for the decision, however according to Lord Esther … “Is that the negotiation before the time when the policy is affected is mere statement of intentions, and till the insurance company accepts the premium, they have a right to decline to accept the risk”.

 

3) Intention to create legal relationship: The insurer and the insured must exhibit a mutual intention to create a legal relationship between themselves within the period of negotiation of the contract and the exchange of offer and acceptance. If this essential element is lacking, there cannot be a valid legal contract. Since it is difficult to determine the intentions of the mind, it is therefore not easy to prove the existence of an intention to create legal relations.

But for insurance contracts that fall within the ambit of a commercial or business, there is a strong presumption that the parties intend to create legal obligation between themselves. However, these commercial or business characteristics which create a legal intention must be differentiated from the situation where the contract is social, graduations or spiritual in nature. In any of these, there is no legal but social gratuitous or spiritual intention in the contract.

 

4) Legality of the object: The object to be insured in a contract of insurance must be legal and not against public policy. It has been the habit of courts to declare void and against public policy any contract which tends to lead to crime, immorality or other effect prejudicial to the public. In insurance contract, it is necessary to distinguish between an insurance contract with a “tendency to sin” and insurance contract with “tendency to commit crime”.

The insurance with the tendency to sin is valid contract, since tendency to sin is irrelevant in law (Beresford V Royal Exchange (1938) ). It falls within the realm of morality. Thus a policy which tends to prevent marriage is said to be valid and enforceable. But a contract of insurance which is tainted with illegality such as crime is void and unenforceable.

 

ESSENTIAL FEATURES OF AN INSURANCE CONTRACT

The following are the essential features of an insurance contract:

1. Insurable interest: Insurable interest exists when an insured person derives a financial benefit or other kind of benefit from the continuous existence of the insured object. A person has insurable interest in something when loss of or damage to that thing would cause the person to suffer a financial loss or other kind of loss. Therefore the insured must have insurable interest on the object proposed for insurance protection (the subject matter of the insurance).
2. Material fact: A material fact is the material which will influence the judgment of a prudent insurer in fixing premium or determining whether he will take the risk or not. In other words, it is a fact which expression would reasonably result in a different decision. It is important for proposal to disclose all necessary facts about the subject matter of insurance.
3. Disclosure: Insurer needs information from the proposer to decide whether to accept an offer or to decide the price and other terms of the insurance contract. The law imposes a duty of disclosure on the part of the proposer when they seek to take out an insurance cover or to renew an existing insurance cover. Insurance company may refuse to pay a claim or part of a claim under an insurance policy if the policyholder has not complied with their duty of disclosure.
4. Warranties: This is described as something by which the insured undertakes that some particular things shall or shall not be done or some conditions shall be fulfilled. The moment the insured undertakes these things, he must strictly comply with it. Any breach is sufficient for the insurer to avoid the contract.
5. Adhesion: The doctrine of adhesion states that you.must accept the entire insurance contract and all of its terms and conditions without bargaining, Because the insured has no opportunity to change the terms, any ambiguities in the contract will be interpreted in favor of the insured.