ESSENTIALS OF A CONTRACT :
An insurance policy is like any contract, a legal document and enforceable in a court; the provisions of the Indian Contracts Act, 1872 are applicable to insurance contracts as well.
Therefore the essentials elements of a valid contract of insurance would be-
Offer and Acceptance
An offer, intended to create legal relations, must be communicated to the offeree either by words or by conduct.
The phrase ‘insurance is the subject matter of solicitation’ is very commonly seen and heard -what this indicates is that insurance is sought by the person who wants to buy it from the insurer. It is to be solicited or purchased by the consumer. It must be remembered that “Customer’s participation in availing the insurance products and services are purely on voluntary basis.
This means that the insurance company is providing you insurance against a risk on YOUR request/solicitation, i.e. the company agreed to sell you its insurance policy after you solicited or asked for such a sale. In legal terms, insurance is a product that should not be pushed by a seller, but should be pulled by a buyer.
The proposal is made by the insured and accepted by the insurer.
1. Agreement between the Parties – The acceptance of the proposal by the insurer together with the premium is expressed in the form of a contract – the insurance policy; together with the clauses is the basis of the agreement between the parties.
2. There must be Evidence of the Intention of the parties to enter into a contractual relation. This may be provided by the formal procedure of making the promise under seal, or it may be by the existence of consideration.
3. Consideration –The premium paid by the insured for the contract is the consideration
4. The parties must be recognized by the law as having the Capacity to Contract. All aspects regarding the capacity to contract, age, mental capacity and understanding etc as defined in the Indian Contracts Act, 1872 is applicable.
5. The consent of the parties MUST BE REAL; that is to say, the parties must not have been threatened, unduly influenced, deceived or misled in a manner which would nullify their agreement.
6. The subject-matter of the contract must be Legal and Possible.
If one of these essentials is missing, the contract is void, voidable or unenforceable, depending upon the circumstances. A void “contract” is a contradiction in terms for it never can be a contract. A voidable contract is valid but, at the option of one of the parties,
We have already familiarized ourselves with the principles of insurance. To refresh ourselves, let’s take a quick look again –
1. Principle of Uberrimae fidei (Utmost Good Faith),
2. Principle of Insurable Interest,
3. Principle of Indemnity – with corollaries
(i) Principle of Contribution,
(ii) Principle of Subrogation,
4. Principle of Loss Minimization, and
5. Principle of Causa Proxima (Nearest Cause).
In the chapter on risk management, we noted that insurance is a method of risk transfer, where many share the losses of a few. The whole concept of insurance is spreading the risk. The principle of indemnity is the basis of the existence and spread of insurance- the fact that a person, who has suffered losses, needs to be placed in the position where he was prior to the loss or as if the loss had in fact not happened.
The main point to be noted here is that the loss should be fortuitous, or accidental, the loss should not be inevitable.
Uninsurable perils – Losses arising out of war or a warlike action or rebellion and nuclear risks are generally excluded by all insurance because these losses are unpredictable and are often catastrophic in nature. Similarly insurance companies also exclude normal wear and tear, gradual deterioration, and damages due to insects etc, because these are inevitable, non-accidental and are normal losses.