In this article we are going to discuss important aspects of Insurance Contract. Main ingredients and principles on which insurance contract is generally drawn.
INSURANCE CONTRACT
A contract of insurance is an agreement whereby one party, called the insurer, undertakes, in return for an agreed consideration, called the premium, to pay the other party, namely the insured, a sum of money or its equivalent in kind, upon the occurrence of a specified event resulting in a loss to him.
The policy is a document which is evidence of the contract of insurance. The Indian Contract Act, 1872, sets forth the basic requirements of a Contract.
AS PER SECTION 10 OF THE INDIAN CONTRACT ACT,1872
- "All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void".
- An Insurance policy is also a contract entered into between two parties, viz., the Insurance Company and the Policyholder and fulfills the requirements enshrined in the Indian Contract Act, 1872.
ESSENTIALS OF A VALID INSURANCE CONTRACT
1. PROPOSAL
When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal ("Promisor"). In Insurance parlance, a Proposal form (also called application for insurance) is filled in by the person who wants to avail insurance cover giving the information required by the insurance company to assess the risk and arrive at a price to be charged for covering the risk (called "premium).
The insurance company, based on the information furnished in the proposal form, assesses the risk (also called underwriting), and conveys the decision – if accepted, at what premium and on what terms and conditions.
This is also called "counter offer" in insurance terminology by the insurance company to the Customer. A medical examination is also conducted, where necessary, before making the counter offer.
Where the insurance company cannot accept the risk, the proposal is declined. Where the insurance company conveys its decision to accept the risk quoting a premium, a proposal is made.
2. ACCEPTANCE
When a person to whom the proposal is made, signifies his assent thereto, the proposal is said to be accepted ("Promisee"). A proposal, when a accepted, becomes a promise.
3. CONSIDERATION
When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise. As can be seen from the above, amount equal to Premium paid by the Customer becomes the consideration for the contractEvery promise and every set of promises, forming the consideration for each other, is an agreement;
4. COMPETENCY TO CONTRACT
Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is sound mind and is not disqualified from contracting by any law to which he is subject. In the case of Insurance the person with whom the Contract is entered into is called "Policyholder" or "Policy Owner" who could be different from the subject matter which is insured. In Life insurance contracts, for example, the person whose life is insured could be different. For example, the Policyholder could be the Father and the Life assured could be the son. In the case of Fire insurance, the Policy owner could be the Owner of a building and the subject matter of insurance would be the building itself. The Policyholder must have attained the age of majority at the time of signing the proposal and should be of sound mind and not disqualified under any law. However, the life assured could suffer from the above infirmities.
5. CONSENSUS AD IDEM
Two or more person are said to consent when they agree upon the same thing in the same sense. Both the insurance company and the Policyholder must agree on the same thing in the same sense. The Policy document issued to the Policyholder ("Customer") clearly defines the obligations of the insurer and the terms and conditions upon which the Insurance contract is issued. Free consent: Consent is said to be free when it is not caused by –
1. Coercion, or
2. Undue influence, or
3. Fraud, or
4. Misrepresentation, or
5. Mistake.
The third and fourth grounds which vitiate consent are more relevant in insurance. Insurance contracts are based on the principles of 'utmost good faith'. The Policyholder is expected to disclose about the status of his health, family history, income, occupation or about the subject matter insured truthfully without concealing any material fact to enable the underwriter to assess the risk properly. In case it is established by the insurance company that the Policyholder did not truthfully disclose any fact in the Proposal form which had a material impact on the decision of the underwriter, the insurance company has a right to cancel the contract.
When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused.
6. LAWFUL OBJECT
The consideration or object of an agreement must be lawful, The consideration or object of an agreement is unlawful under the following circumstances:
(a) Where a contract is forbidden by law; or
(b) Where the contract is of such nature that, if permitted, it would defeat the provisions of any law or is fraudulent;
(c) Where the contract involves or implies, injury to the person or property of another; or (d) Where the Court regards it as immoral or opposed to public policy.
Every agreement of which the object or consideration is unlawful is void.
7. AGREEMENT MUST NOT BE IN RESTRAINT OF TRADE OR LEGAL PROCEEDINGS
Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. Every agreement, by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights, is void to the extent.
8. AGREEMENT MUST BE CERTAIN AND NOT BE A WAGERING CONTRACT
Agreements, the meaning of which is not certain, or capable of being made certain, are void. Agreements by way of wager are void; and no suit shall be brought for recovering anything alleged to be won on any wager, or entrusted to any person to abide the result of any game or other uncertain event on which may wager is made.
Anson defined wager as "a promise to give money or money's worth upon the determination or ascertainment of an uncertain event".
For example, if A agrees to pay B Rs.1,000, if it rains tomorrow, it becomes a gambling, since there is no certainty that it will rain tomorrow. A wagering contract is void, it is not illegal.
Further a contingent contract is defined under Section 31 of the Act as "a contract to do or not to do something, if some event collateral to such contract, does or does not happen".
For example, A contracts to pay B Rs. 10,000 if B's house is burnt. This is a contingent contract. An insurance contract is a contingent contract and the example given above is nothing but Fire insurance. While all Wagering contracts are Contingent contracts, Section 30 of the Act has declared all Wagering contracts to be void.
FEATURES OF AN INSURANCE CONTRACT
Though all contracts share fundamental concepts and basic elements, insurance contracts typically possess a number of characteristics not widely found in other types of contractual agreements. The most common of these features are listed here:
(a) ALEATORY
(Depending on an uncertain event or contingency as to both profit and loss the aleatory )
If one party to a contract might receive considerably more in value than he or she gives up under the terms of the agreement, the contract is said to be aleatory. Insurance contracts are of this type because, depending upon chance or any number of uncertain outcomes, the insured (or his or her beneficiaries) may receive substantially more in claim proceeds than was paid to the insurance company in premium. On the other hand, the insurer could ultimately receive significantly more money than the insured party if a claim is never filed. However, Insurance contracts are based on the concept of "pooling of risks". While Insurance companies may pay claim in some cases, it may not pay claim in many other cases. On an overall basis, if the Premiums received are sufficient to cover the remuneration paid to intermediaries, expenses, management expenses, profit-margins as well as Claims, insurance business would be viable.
(b) ADHESION
In a contract of adhesion, one party draws up the contract in its entirety and presents it to the other party on a 'take it or leave it' basis; the receiving party does not have the option of negotiating, revising, or deleting any part or provision of the document. Insurance contracts are of this type, because the insurer writes the contract and the insured either 'adheres' to it or is denied coverage. In a court of law, when legal determinations must be made because of ambiguity in a contract of adhesion, the court will render its interpretation against the party that wrote the contract. Typically, the court will grant any reasonable expectation on the part of the insured (or his or her beneficiaries) arising from an insurer-prepared contract. This Principle is called " Principle of Contra Preferentem".
(c) UTMOST GOOD FAITH
Although all contracts ideally should be executed in good faith, insurance contracts are held to an even higher standard, requiring the utmost of this quality between the parties. Due to the nature of an insurance agreement, each party needs - and is legally entitled - to rely upon the representations and declarations of the other.
Each party must have a reasonable expectation that the other party is not attempting to defraud, mislead, or conceal information and are indeed conducting themselves in good faith. In a contract of utmost good faith, each party has a duty to reveal all material information (that is, information that would likely influence a party's decision to either enter into or decline the contract), and if any such data is not disclosed, the other party will usually have the right to void the agreement.
(d) EXECUTORY
An executory contract is one in which the covenants of one or more parties to the contract remain partially or completely unfulfilled. Insurance contracts necessarily fall under this strict definition; of course, it's stated in the insurance and agreement that the insurer will only perform its obligation after certain events take place (in other words, losses occur).
(e) UNILATERAL
A contract may either be bilateral or unilateral. In a bilateral contract, each party exchanges a promise for a promise. However, in a unilateral contract, the promise of one party is exchanged for a specific act of the other party. Insurance contracts are unilateral in nature. The insured performs the act of paying the policy premium, and the insurer promises to reimburse the insured for any covered losses that may occur. It must be noted that once the insured has paid the policy premium, nothing else is required on his or her part; no other promises of performance were made. Only the insurer has covenanted any further action, and only the insurer can be held liable for breach of contract.
(f) CONDITIONAL
A condition is a provision of a contract which limits the rights provided by the contract. In addition to being executory, aleatory, adhesive, and of the utmost good faith, insurance contracts are also conditional. Even when a loss is suffered, certain conditions must be met before the contract can be legally enforced. For example, the insured individual or beneficiary must satisfy the condition of submitting to the insurance company sufficient proof of loss, or prove that he or she has an insurable interest in the person insured. There are two basic types of conditions:
(i) conditions precedent; and
(ii) conditions subsequent.
A condition precedent is any event or act that must take place or be performed before the contractual right will be granted.
For instance, before an insured individual can collect medical benefits, he or she must become sick or injured. Further, before a beneficiary will be paid a death benefit, the insured must actually become deceased. A condition subsequent is an event or act that serves to cancel a contractual right. A suicide clause is an example of such a condition. Typical suicide clauses cancel the right of payment of the death benefit.
(g) PERSONAL CONTRACTS
Insurance contracts are usually personal agreements between the insurance company and the insured individual, and are not transferable to another person without the insurer's consent. (Life insurance and some maritime insurance policies are notable exceptions to this standard.) As an illustration, if the owner of a car sells the vehicle and no provision is made for the buyer to continue the existing car insurance (which, in actuality, would simply be the writing of the new policy), then coverage will cease with the transfer of title to the new owner.
(h) WARRANTIES AND REPRESENTATIONS
A warranty is a statement that is considered guaranteed to be true and, once declared, becomes an actual part of the contract. Typically, a breach of warranty provides sufficient grounds for the contract to be voided. Conversely, a representation is a statement that is believed to be true to the best of the other party's knowledge. In order to void a contract based on a misrepresentation, a party must prove that the information misrepresented is indeed material to the agreement. According to the laws of most states and in most circumstances, the responses that a person gives on an insurance application are considered to be a representations, and not warranties.
As an example, consider an individual seeking life insurance coverage. He or she would routinely be required to complete an application, on which the applicant's sex and age would be requested. The accuracy of this information is necessary for the insurer to correctly ascertain its risk and determine the policy premium. If the applicant gives these responses incorrectly, they would likely be deemed (in the absence of outright fraud) as misrepresentations, and could possibly be used by the insurance company as grounds for voiding the policy.
There is, however, a difference between the representation (or misrepresentation) of a fact and the expression of an opinion.
Take, for instance, a common insurance application question such as, "To the best of your knowledge, do you now believe yourself to be in good health?
" An applicant answering 'yes' while knowing that he or she suffers from a particular condition would be guilty of misrepresenting an actual fact.
However, if the applicant had no symptoms of any kind that would be recognizable to an average person and no doctor's opinion to the contrary, he or she would simply be stating an opinion and not making a misrepresentation.
(i) MISREPRESENTATIONS AND CONCEALMENTS
A misrepresentation is a statement, whether written or oral, that is false. Generally speaking, in order for an insurance company to void a contract because of misrepresented information, the information in question must be material to the decision to extend coverage. Concealment, on the other hand, is the failure to disclose information that one clearly knows about. To void a contract on the grounds of concealment, the insurer typically must prove that the applicant willfully and intentionally concealed information that was of a material nature.
(j) FRAUD
Fraud is the intentional attempt to persuade, deceive, or trick someone in an effort to gain something of value. Although misrepresentations or concealments may be used to perpetrate fraud, by no means are all misrepresentations and concealments acts of fraud. For instance, if an insurance applicant intentionally lies in order to obtain coverage or make a false claim, it could very well be grounds for the charge of fraud. However, if an applicant misrepresents some piece of information with no intent for gain (such as, for example, failing to disclose a medical treatment that the applicant is personally embarrassed to discuss), then no fraud has occurred.
(k) IMPERSONATION (false pretenses)
When one person assumes the identity of another for the purpose of committing a fraud, that person is guiltyof the offense of impersonation (also known as false pretenses). For instance, an individual that would likely be turned down for insurance coverage due to questionable health might request a friend to stand in for him (or her) in order to complete a physical examination.
(l) PAROL (or Oral) evidence rule
This principle limits the effects that oral statements made before a contract's execution can have on the contract. The assumption here is that any oral agreements made before the contract was written were automatically incorporated into the drafting of the contract. Once the contract is executed, any prior oral statements will therefore not be allowed in a court of law to alter or counter the contract.
CONCLUSION
An insurance is a promise to the insured given by an insurance company to financially indemnify him/her/it against loss or damage sustained due to any insured perils. The consideration for the promise will be premium paid by the insured to the insurer. A policy documents issued by the insurer to the insured containing terms and conditions of insurance is called " Insurance Contract" and governed by the Indian Contract Act, 1872. A insurance contract is drawn on various principles and insurance company has majority to say. Since the insured has nothing to say more in the agreement and forced to accept the terms and conditions imposed by the insurance company. If any ambiguity raises in future on any terms and conditions of the contract them , court generally prefer the insured. So it is utmost important to drawn insurance agreement with utmost care. The insurance contract is based in Principles of Indemnities , these are Utmost Good Faith, Insurable Interest, Proximate Cause, Contribution and
Subrogation
It is duty of insurer and the insured to disclose all material facts so that insurer make an informed decision ,whether to provide insurance or not and how much premium to be charged. So it is clear that both parties to the agreement should come with clean hand to avoid further dispute and rejection of claim.
DISCLAIMER: The article presented here is only for sharing information and knowledge with the readers. The views are personal. Please do consult with insurance professionals for more understanding and clarity on subject matter.
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