Principles of Insurance (Part 1)
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Insurance as a contract

In basic terms, a contract is a binding legal agreement between two or more parties promising specified performance in exchange for "consideration".

Consideration is normally expressed in terms of money. From an insurance standpoint, when an insurance company agrees to pay for an insured's losses in exchange for a premium, the two parties have entered into a contract.

For a contract to be legally valid, it requires the following:
1. Competent parties
2. Legal purposes
3. Offer and acceptance
4. Consideration

Competent parties
The parties to the contract must be considered competent under the law. Examples of parties that might not meet the competency test would be:
  • People who are under undue influence at the time they contract such as being intoxicated or medically impaired
  • People who are declared legally insane
  • People who are minors in the eyes of the law (emancipated minors can be an exception to the rule)

    Legal purposes
    Contracts that are constructed for illegal or immoral purposes or are against the public welfare fall within the unenforceable category.

    For example, contracts to kill someone's husband, to set someone's warehouse on fire, or to purchase stolen goods are examples of contracts that are not enforceable.

    Offer and acceptance
    The concept of an offer and acceptance represents the basic concept that there are at least two parties to the contract - one party making the offer and the other party accepting the offer. This is the basis for any contractual agreement.

    Consideration
    In the insurance transaction, the premium constitutes the "consideration" paid by the insured in exchange for the insurance protection provided under the insurance contract by the insurer. If that premium is not paid to the insurance company, the insurer has the right to rescind their offer of insurance.

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    Not only are policy forms, clauses, rules and court decisions constantly changing, but forms vary from company to company and state to state. This material is intended as a general guideline and might not apply to a specific situation. The authors, LunchTimeCE, Inc., CEfreedom, and Insurance Skills Center, and any organization for whom this course is administered will have neither liability nor responsibility to any person or entity with respect to any loss or damage alleged to be caused directly or indirectly as a result of information contained in this course.