ESSENTIALS FOR A VALID 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 paralance, 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). When a proposal form is submitted, the Customer does not make a proposal, but it is only “invitation to offer”. 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;

When the Customer accepts the terms of the offer and signifies his assent by paying the First Premium (the amount payable as the consideration), the proposal is accepted by the Customer. A proposal of the insurance company (terms of offer), when accepted by the Customer, 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 First Premium paid by the Customer becomes the consideration for the contract. This first premium would be the first instalment premium (either first annual, quarterly, half yearly or monthly premium. In the case of monthly premiums normally 2 monthly premiums are collected along with the Proposal form. In the case of single premium, one lump sum is paid along with the Proposal.

Every 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.

The object of an insurance contract, i.e. to cover the risk by taking out an insurance policy, is a lawful object.

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 `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 `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.