Insurance is a contract (one)

Justice Peprah AGYEI

Envisage that you’re deliberating on motor insurance coverage with a potential insurer who queries why he/she should pay an annual premium even if he/she doesn’t make a claim. Bearing in mind that an insurance contract encompasses fortuitous events and the exchange of unequal amounts, how can you explain to him/her why his/her payments will still be valuable?


A contract is a legally enforceable agreement. Individuals enter into agreements for many reasons, but not all agreements are legally binding contracts. To create an operative, binding contract, you need to understand what essentials are needed to create a legally enforceable agreement and the different types of contracts. For a contract to be legally enforceable, it must have these features: agreement (offer and acceptance), capacity (the competence of all parties), mutual assent, consideration, legal purpose, and the form required by law.


The first element is an agreement between all parties. An agreement must include an offer and its acceptance. To create a legally enforceable contract, the offeror (party making the offer) must use language that establishes a desire to create a binding contract with the offeree. The offer can be a demand or promise, made orally or in writing to one person, a group or class of people, or the public. Acceptance requires the offeree to agree to the offer unconditionally and unequivocally.

Insurers make an offer to proposers. Insurance terms, conditions, exclusions and premiums are explained to proposers and they can either accept or reject them. 


For a contract to be legally binding, all parties who enter into it must be mentally competent – that is, they must be able to understand the nature and consequences of the agreement. Those who do not typically meet this requirement include minors, insane or intoxicated individuals, and artificial entities (such as insurers) that are restricted from entering into certain contracts.

All parties to an insurance contract must meet these capacities to make the contract enforceable. 

Mutual Assent

To be enforceable, contracts require mutual assent. This is the act of two or more parties deliberately negotiating all terms to achieve consensus. The corresponding agreement forms the basis of the contract. There are insurance policies where the proposer brings policy terms and conditions. To reach mutual assent, it should be agreed by all parties to the contract. 


Consideration goes hand in hand with mutual assent, and is something of value that is given in return for a promise. It can be monetary or a promise to perform or refrain from an act. Think of mutual assent and consideration this way: a contract has to be a two-way street in which both parties exchange something of value and agree on what will be exchanged. Policyholders are required to pay premiums and insurers are required to pay compensation or benefit. 

Legal Purpose

This may seem obvious, but for a contract to be legally enforceable, it must serve a legal purpose. A contract is illegal when it conflicts with constitutional, statutory, or case law or public policy. For example, a property insurance policy on a building housing illegal gambling is enforceable because the coverage applies to the building, not the activity.  

In the Form Required by Law

A contract must also be in a proper, legally stipulated form to be binding.  Most people assume that for a contract to be valid it must be in writing, but that’s not true. Many contracts are oral. States allow some forms of oral insurance contracts to be legally enforceable, but most insurance contracts end up being written because of their complexity.                                                                                                                        Insurance Contracts

Insurance contracts must contain all the necessary elements of a legally enforceable contract, so they are similar to other contracts in many ways. However, insurance contracts have distinctive features and their own body of law. In addition to having the essential elements of all contracts, valid insurance contracts have certain special characteristics. These characteristics will be looked into over the coming weeks.

A Chartered Insurer and an Associate of the Chartered Insurance Institute of United Kingdom and also Ghana (ACII-UK, ACIIG),

+233 (0) 549705031                      [email protected]



Navigating the Legal Landscape of Insurance, American Institute for Chartered Property and Casualty Underwriters. Edited by Martin J. Frappolli




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