Insurance is a contract, and it has special features

Justice Peprah AGYEI.

A contract has been defined as a legally enforceable agreement. Various elements make a contract a legally enforceable agreement. These include agreement (offer and acceptance), capacity (the competence of all parties), mutual assent, consideration, legal purpose, and the form required by law. These are found in most general contracts.

  1. Features of Enforceable Contract
  2. Agreement

An agreement must include an offer and its acceptance. 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.

  1. Capacity

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.

  1. 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.

  1. Consideration

Consideration goes hand in hand with mutual assent, and is something of value that is given in return for a promise. A contract has to be a two-way street in which both parties exchange something of value and agree on what will be exchanged.

  1. 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.

  1. In the Form Required by Law

A contract must also be in a proper, legally stipulated form to be binding. States allow some forms of oral insurance contracts to be legally enforceable, but most insurance contracts end up being written because of their complexity.

  1. 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 in their own body of law. In addition to having the essential elements of all contracts, valid insurance contracts have certain special characteristics. These characteristics include the following;

  1. Insurance is a contract of Adhesion

Any contract in which one party is put in a take-it-or-leave-it position and must either accept the contract as written by the other party or reject the contract entirely is a contract of adhesion. Because the insurer drafts the exact wording of the policy, the insured has little option but to take it or leave it. This means the insured must adhere to the contract prepared by the insurer. Hence, insurance policies are considered to be contracts of adhesion, which means that one party (the insured) must adhere to the contract as written by the other party (the insurer). This characteristic expressively influences the application of insurance policies.

If a disagreement arises between the insurer and the insured about the meaning of certain words or phrases in the policy, the insured and the insurer are not treated the same or equally. The insurer either drafted the policy or used a standard policy form at its own choice; in contrast, the insured did not have anything to do with policy-drafting. For that reason, if the policy wording is unclear or ambiguous, a court will generally apply the interpretation that favours the insured.

  1. Insurance is a contract of utmost good faith

Insurance is a service that involves a promise to pay compensation in the future. This means it requires complete honesty and full disclosure of all vital facts by both parties (insured and insurer). Concealment is the purposeful failure to disclose a material fact. The insurer must usually show that the insured knew that the information should have been given and then intentionally withheld it. Second, the insurer must establish that the information withheld was a material fact.

From the legal definition, a material fact is a fact that would be important to a reasonable person in deciding whether to engage or not to engage in a contract.  In the case of motor insurance, for example, material facts include use of the car – you cannot insure your car as private and use it for hiring or as a taxi.

Again, another principle against utmost good faith is a misrepresentation. In insurance, a misrepresentation is a false statement of a material fact on which the insurer relies and provides cover. The insurer does not have to prove that the misrepresentation is intentional. As with non-disclosure, if a material fact is misrepresented, the insurer could choose to avoid the policy because of the violation of utmost good faith.

  1. Insurance is a conditional contract

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 that the insurance policy for that period has been of no value. 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 honour its agreements with all insureds that have similar policies.

  1. Insurance is  a contract of indemnity

Indemnity in insurance contracts may be looked at as the exact financial compensation sufficient to place the insured in the same financial position after a loss as he enjoyed immediately before it occurred. This was defined in the case of Castellain v. Preston (1883). A contract of indemnity does not necessarily fully indemnify insureds. However, the amount the insurer pays is directly related to the amount of the insured’s loss.

Other insurance policies are benefit policies, and these include most life assurance policies and personal accident policies. The principle of indemnity does not apply to valued and benefits policies. Also, most insurance contracts are based on the principle of indemnity.

Liability insurance generally pays to a third-party claimant, on behalf of the insured, any amounts (up to the policy limit) that the insured becomes legally obligated to pay as damages because of a covered liability claim, as well as the legal costs associated with that claim.

  1. The Principle of Contribution

“The right of an insurer to call upon other insurers similarly, but not necessarily equally, liable to the same insured to share the cost of an indemnity payment.”

Policies usually contain another insurance principle to prevent an insured from receiving full payment from two different insurance policies for the same claim. This principle is called Contribution.

How contribution arises

  • When there are two or more policies
  • Covering the same peril
  • Covering the same subject matter
  • And they are all liable to pay the loss
  1. The Principle of Subrogation

Insurance contracts usually protect the insurer’s subrogation rights. The right of one person, having indemnified another under a legal obligation to do so, to stand in the place of that other and avail himself of all the rights and remedies of that other, whether already enforced or not.

Other insurance provisions and subrogation provisions clarify that the insured cannot collect more than the amount of the loss. For example, following a motor accident in which the insurer compensates its insured when the other driver is at fault, the subrogation provision demands that the insured’s right to recover damages from the blamable party is transferred (subrogated) to the insurer. The insured cannot receive from both the insurer and the liable party.


  1. Insurance is a contract based on Insurable Interest

A person cannot buy life insurance on the life of a stranger, hoping to gain if the stranger dies. The legal right to insure arising out of a financial relationship recognised at law, between the insured and the subject matter of insurance, is called insurable interest.

Ways Insurable interest may arise

  • Common law: For example, through ownership of property or liability at common law.
  • Contract: For example, where the tenant agrees in a lease to accept responsibility for the maintenance or repair of a building.
  • Statute: For example, the Married Women’s Property Acts provide married women with an insurable interest in their own lives and their husbands’ lives, for the wives’ benefit.

When Insurable Interest Must Exist

  • Marine insurance: The assured must be interested in the subject matter insured at the time of the loss. There need be no insurable interest when the insurance is affected. The insured should be able to prove at the time of loss that he has an insurable interest.
  • Life assurance: Insurable interest is required at inception only. The policyholder should be able to prove that he has an insurable interest in the life of the assured person at the time of taking the policy.
  • Other insurances: Insurable interest must exist at inception, at the time of the loss and throughout the currency of the contract – e.g. motor insurance. This is the main reason why when you sell your vehicle, you cannot and are not supposed to add insurance for the person; because your interest in the vehicle is gone but the insurance is in your name.
  1. Insurance as a third-party beneficiary contract

A third-party beneficiary, in the law of contracts, is a person who may have the right to sue on a contract despite not having originally been an active party to the contract. Insurance contracts demonstrate many of the ways third-parties can benefit from agreements.

In a life insurance policy, for example, the contract between the insured and the insurer in most cases is for the benefit of a third person –  the beneficiary. Property insurance also can provide benefits to third-parties in some circumstances, particularly when property interests are being transferred or when interests in real estate are limited or shared. An insurance contract can benefit as a third-party in two primary ways:

  • Insurance contracts can protect third-parties in cases of injury or damage.
  • Insurance contracts can protect third-parties in real estate sales and mortgages, such as lease interests and life estates.

A typical example in Ghana is when a fare-paying passenger gets injured in a motor accident. He stands to benefit from the motor insurance policy of the driver who caused the accident, thereby causing the injury/death or property damage. This is why pedestrians need to check the validity of vehicles before using their services. For instance, the motor third-party insurance cover will pay on behalf of the insured or the driver, in respect of legal liability to third-parties resulting from an accident caused by his/her vehicle. The insurer will indemnify:

  • The owner or any other person driving, using or in charge of the vehicle with the consent of the owner, or any authorised passenger getting in, on or out of the vehicle for:
  • death of or bodily injury to any person, and/or
  • damage to property belonging to someone other than the insured
  • death of or bodily injury to a member of the insured household or any other occupants
  • the policy also pays compensation for the driver for bodily injury or death.

Without the motor third-party insurance in place, all the costs concerning the above would have been borne by the insured or the driver.

  1. Insurance is a Contract Involving Fortuitous Events

From the dictionary, fortuitous simply means happening by chance rather than intention. According to CPR Insurance Services, happening by accident or chance or  occurring unexpectedly, accidentally, casual, chance, contingent, fluky, inadvertent, odd. This is a word we use in the insurance industry quite a bit to describe what an insurable risk is.

Something fortuitous is something that happens out of the blue, accidentally or by chance. We use it in the insurance industry because the risk is only perfectly insurable when it is fortuitous.

  1. Insurance is a contract involving Exchange of Unequal Amounts

Imagine 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. In simple terms, the premium paid by one insured reflects his proportionate share of the total amount the insurer expects to pay to honour its agreements with all insureds that have similar policies. The premiums are just fractions of the compensation we expect to receive in the event of the happening of an insured peril.

  1. The proximate cause

 Proximate cause is “the active and efficient cause that sets in motion a train of events which bring about a result, without the intervention of any force started and working actively from a new and independent source”. Pawsey v Scottish Union & National (1908).

A dispute may arise about the cause of a loss under an insurance policy. The insurer will want to establish the exact cause to determine that he is liable to pay a claim or to determine what proportion of a claim he is liable to pay. There must therefore be rules to distinguish between the operation of one peril and another, and to define how close the relationship must be for the insured to recover in respect of a loss not immediately caused by an insured peril. The doctrine of proximate cause is used in such instances.


When asked what insurance does, most people are quick to state that it provides protection against financial aspects of premature death, injury, loss of property, loss of earnings power, legal liability or other unexpected expenditure. While all that is abundantly true, the industry’s contribution to the economy goes much further.

One could point to the millions of people employed in insurance and related activities, to the billions in income taxes and premium taxes paid to governments across the globe and to the extensive charitable works. However, significant as they are, these are by-products of an industry that is at the heart of growth and development of every modern economy.

The contributions of the insurance sector to this growth and development process can be categorised under three main headings: namely safety/security; economic/financial stability; and development (Welsbart, 2018).

The writer is  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,is%20the%20intended%20beneficiary%20of%20the%20contract%2C%20


insurance contract – Bing images

Weisbart. S (2018). How Insurance Drives Economic Growth, Insurance Information Institute [email protected]

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