An agreement that is enforceable by the law of the land is called a contract. Any party entering into a contract with another is legally bound to follow the terms and conditions of the contract. A contract of insurance comes into existence when there is an offer from the person facing the risk and the insurer accepts the offer by issuing the policy.
The policy is a detailed description of the terms and conditions of the contract and the benefits it extends to the insured. A breach of these terms and conditions between any of the parties involved results in invalidation of the contract.
Table of Content
An insurance policy is a legal contract whose structure is subject to the accomplishment of certain fundamentals defined under the Indian Contract Act, 1872.
Requirements of Insurance Contract
Offer and acceptance
To start with, there must be an offer or acceptance of the terms and conditions of a contract. An offer can be made either by the insurance company or the prospective policy owner and the acceptance will take place thereafter. There has to be an offer by one party and an acceptance by the other party.
In insurance, it is the prospective buyer, known as a proposer, who first offers to accept the terms. The offer by the proposer for insurance should be accompanied by the payment of premium. The acceptance of an offer to be insured takes place when the insurability of the applicant has been determined by the insurer.
It is the monetary payment assigned to each contracting party. Consideration is the act or promise obtainable by one party of the contract and acknowledged by the other party as the cost or value of promise of the former party.
In insurance contracts, the consideration is the premium that the policy owner provides to the insurance company as the cost of the promise that the insurance company acknowledges to compensate. The insurer’s consideration is its promise to pay the insured a certain amount in the event of a peril happening or to perform activities as specified in the contract.
Capacity to contract
As per this requirement, every individual is proficient to enter into a contract provided he/she is of the age of majority that is 18 years of age as per the Indian law. Minors, people of unsound mind, enemy, aliens and insolvent and bankrupt people declared by the courts cannot enter into a valid contract. Parties who have no legal capacity to contract include:
- Insane people who will not be in a position to understand the nature (obligations and liabilities) of the agreement and abide by it.
- Intoxicated people who are under the influence of alcohol or similar intoxicating substances.
- Any corporation that acts outside the scope of its charter, by-laws, articles of incorporation, or authority
Consensus ad idem
It is an essential element of the contract, which clearly signals and proposes that the parties entering into a contract need to be in sync with the intention and purpose of getting into a contract. ‘Consensus ad idem’ signifies when two or more people agree on the same thing in the same sense, they are said to be consented.
The parties should have a common understanding, consent and must be on same mental equilibrium as far as the understanding of the purpose is concerned. There should not be a dispute or mismatch of the understanding else the contract will not hold its validity.
Legality of object
It implies that the very purpose of the contract should be legal in nature. The consideration or object of an agreement should be legally recognised. Deliberation or object of an agreement is considered to be against the law under the following circumstances:
- Where a contract is illegal by law, or
- Where the contract is of such character that if acceptable, it should not trounce the provisions of any law or is falsified or deceptive in nature.
- Where the contract engrosses or entails damage to any individual or property of another.
- Where the law considers the contract as corrupt or depraved, or conflicting to public policy.
- Where the consideration or the purpose is against the law (is to be termed as void).