GENERAL PRINCIPLES OF INSURANCE

 INTRODUCTION

An insurance contract is an agreement between an insurance company and the individual effecting the insurance cover. Such an individual is referred to as the insured.

An insurance contract falls under the general heading of simple contracts. Hence, it is a “legally binding agreement” made between two or more parties, by which rights are acquired by one or more to act or forbearances on the part of the other parties.

Generally persons who effect insurance do it either because they are legally required to do so or they cannot accommodate the risks themselves or both.

The Nature of Insurance Contracts

Insurance contracts must satisfy the requirements of simple contracts.

These requirements are considered below.

 Offer and Acceptance

An offer is a communication of the contract terms by one party to another. Acceptance refers to the letter’s agreement of those terms. In motor insurance contract, the offer is made by the proposer when he completes a proposal form. The insurer accepts by issuing a cover note. However, where an insurer, imposes additional terms then the insurer has made a counter offer which is assumed accepted by the proposer on his agreement to pay the premium based on the new terms.

 Consideration

Consideration refers to the gain or benefit received by one party in return for a promise or the performance of an act of another. In an insurance contract, the consideration consists on the one hand of the insurer’s promises to compensate the insurer for a loss, and on the other hand of the premium payment by the insured, to the insurer. The promise to make good any loss suffered by the insured is the consideration of the insurer. However, while the insured’s consideration is available at the beginning of the contract that of the insurer shall be available at some future date.

Legal Capacity of Parties

Certain categories of persons are not qualified to enter into insurance contracts. These include persons of unsound mind and minors. Therefore contracts made by them may be set aside.

Consensus and Idea

This Latin expression means “in complete agreement of mind”. With respect to motor insurance, for instance, this implies that both the proposer and the underwriter must be falling about the same or and for a particular scope of cover. Hence, if the proposer aims at using his vehicle for commercial purposes, the underwriter must not assume that the vehicle is to be used for private and social purposes.

 Legality

Contracts must not be illegal, that is, they are invalid if they are forbidden by statute or are against what is called public policy.

 No Mistakes

There must not be a mistake in making the contract. If one or both of the parties to a contract makes a mistake in the process of making the agreement, the effect of such a mistake depends on the nature of the error. A mistake may make the contract invalid where there is no agreement over the contract.

No Misrepresentation or Fraud

A representation is a factual statement made by one party to the other which is intended and succeeds in persuading the latter to enter into the contract. If such a statement is false it is a misrepresentation. If misrepresentation is fraudulent, the insured party can:

Carry on with the contract; or
He can claim damages if he has suffered a loss, and
He can either refuse to perform the agreement or rescind the contract.

 CONCLUSION

We have explained the principles of insurance contract, the definition of insurance contract and the rules governing insurance contracts.

 SUMMARY

A contract is an agreement between two or more participants which is legally binding. A legally binding agreement between the buyer (the insured) and the seller of insurance (the insurer is a contractor of insurance).

In a contract of insurance, the insurer and the insured must agree on details such as the price, the effect and nature of cover and so on. These terms are usually set out by the insurer in a document called the policy. Consideration consists of the insurer’s promising to compensate the insured for a loss and the insured paying their premium.

All parties to a contract must have legal capacities to enter into agreement and there must be an agreement of mind.

Also, the contract must not be illegal, it must have no mistakes and no misrepresentation or fraud.