A contract has been defined as a legally enforceable agreement. We have explained in our earlier write-ups the elements that make a contract be a legally enforceable agreement. These, we said, include agreement (offer and acceptance), capacity (the competence of all parties), mutual assent, consideration, legal purpose, and the form required by law.
Insurance contracts should have all the necessary elements of a legally enforceable contract, so they are similar to other contracts in many ways. Nonetheless, insurance contracts have distinctive features and their own body of law. In addition to having the necessary elements of all contracts, valid insurance contracts have certain special characteristics. We have discussed two of the elements which include adhesion and utmost good faith. Today, we discuss insurance as a conditional contract.
Insurance policies are taken to cover specified losses or perils. An insurance policy is a conditional contract because whether the insurer pays a claim depends on whether a covered loss has happened. Furthermore, the insured must fulfil certain obligations before a claim is paid, such as giving early notice to the insurer after a loss has occurred. A covered loss might not arise during a particular policy period, but that does not mean the insurance policy for that period has been of no value.
In buying an insurance policy, the insured obtains a valuable promise. This is the insurer’s promise to make payments if a covered loss happens. The promise exists, even if the insurer’s performance is not required during the policy period. Envisage that you’re discussing motor insurance coverage with a prospective insured, who questions why he should pay an annual premium even if he doesn’t make a claim.
The insurance contract involves fortuitous events and the exchange of unequal amounts. The prospective insured needs to understand that his policy premium reflects his proportionate share of the total amount the insurer expects to pay to honor its agreements with all insureds that have similar policies. While noninsurance contracts involve an exchange of money for a certain event, such as the delivery of goods or services, insurance contracts encompass the exchange of money for protection upon the occurrence of uncertain, or fortuitous, events.
Insurance contracts also involve an exchange of unequal amounts. Regularly, few or no losses occur, and the premium paid by the insured for a particular policy is more than the amount paid by the insurer to or on behalf of the insured. If a large loss occurs, conversely, the insurer’s claim payment might be much more than the premium paid by the insured. The likelihood that the insurer’s obligation may be much greater than the insureds makes the insurance transaction a fair trade.
For example, suppose that an insurer charges a GH¢1,000.00 annual premium to insure a car valued at GH¢40,000.00 motor comprehensive cover; Three situations may occur:
- If the car is not damaged while the policy is in force, the insurer pays nothing.
- If the car is damaged due to a covered cause of loss, the insurer pays the cost of repairs after subtracting a deductible.
- If the car is a total loss, the insurer pays GH¢40,000.00 (minus any deductible).
Unless the insurer’s obligations in a minor accident happen to come to exactly GH¢1,000.00, unequal amounts are involved in all three of these cases. However, it does not follow that insureds that have no losses—or only very minor losses—do not get their money’s value or that insureds involved in major accidents profit from the insurance.
The premium for a particular policy should reflect the insured’s share of estimated losses that the insurer must pay. Many insureds have no losses, but some have very large ones. The policy premium reflects the insured’s proportionate share of the total amount the insurer expects to pay to honor its agreements with all insureds that have similar policies. Kindly follow and let us learn more about what makes insurance contracts special from other contracts.
The writer is 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