Elements of a Contract
Insurance Contract, called a policy, is an agreement between the Insured and the Insurer. An insurance policy must meet the same requirements as a valid contract which is legally enforceable agreement between two or more parties.
The validity of the contract depends upon four essential elements: -
· Agreement (Offer and Acceptance)
· Competent Parties
· Legal Purpose
· Consideration
Agreement (Offer and Acceptance)
The One essential element of the contract is that agreement must exist between the parties of the contract. One party must make a legitimate offer and another party must accept the offer. In other word there must be mutual assent.
To be enforceable, the agreement cannot be the result of duress, coercion, fraud or a mistake. If either party to the contract can prove any of these circumstances, a court declare the contract to be void.
Competent Parties
For the contract to be enforceable, all the parties must be legally competent. In other words, each party must have legal capacity to make agreement binding. Individuals are generally considered to be contract and able to enter into legally enforceable contracts unless they are one or more of the following: -
· Insane
· Under the influence of drug or alcohol
· Minors
Another aspect of legal capacity involves the fact that, in most states, an insurer must be licensed to do business in the state.
Legal Purpose
The courts might consider a contract to be illegal if its purpose is against the law or against public policy.
Insurance contracts must involve a legal subject matter. If the property is illegally owned or illegally possessed goods then it is a invalid contract. In addition, no insurance contract will remain valid if the wrongful conduct of the Insured causes the operation of the contract to violate public policy.
Consideration
Consideration is something of value given by each party to a contract. In insurance, consideration given by the insured is the payment of the premium. Consideration on part of the insurer is promise to pay covered losses. Eventhough, someone purchasing insurance receives only a document containing a promise, that promise has a value because it is a legal obligation.
Insurance Contracts, Loss Exposures and Risk Management
