Insurance is bought for protection and cover by almost everybody; most of the times on the advice of the agent and keeping in view the principal amount. But we do not usually go in to the details of the contract. Let us see the essentials of an insurance contract.

What constitutes a valid contract of insurance?

All the aspects of a contract stand binding to an insurance contract also. They are listed below.

• Offer and acceptance

This forms the basis of the contract, since the individual seeking insurance makes an offer to the insurance company and if the company agrees to extend insurance then it is an acceptance of the offer so made.

• Consideration

The person seeking insurance has to pay premium regularly at pre-determined frequency, thus providing consideration for the services offered by the insurance company. The insurance company on the other hand is bound by contract to pay in case a claim arises. This is consideration from the company’s side.

• Legal capacity

Both parties need to be legally competent to enter into the insurance contract. The insurance company is legally competent to provide cover only when it is registered under the appropriate authority of the country or state. Similarly the person seeking insurance has to be competent to enter the contract i.e. he/ she should not be a minor or mentally ill rendering themselves incapable of entering a contract.

• Legal purpose

Insurance is a legal contract with an insurable interest and not a wagering agreement. Hence the legality of the insurance contract is established while making the proposal to the company.

Insurance contracts are based on certain principles. They are listed below.

• Insurable interest

The insured should suffer a financial loss in case of damage to the property without which an insurer will not provide cover.

• Utmost good faith

The contract is based on the doctrine of good faith i.e. the person seeking insurance should disclose all material facts vital to the contracts.

• Principle of Subrogation

This principle allows the insurer to recover in case a claim arises due to the fault of a third party. But the insurance company has had to pay for the losses to the insured.

• Doctrine of Adhesion

In case there are any ambiguous terms discovered later in the contract then the insured is allowed the interpretation of such a clause. The insured will not be allowed to change the terms of the agreement.

Although the details of insurance contracts are not needed since people depend on their financial planners completely for their insurance decisions, it is advisable to be aware of the terms, since most of you pay a substantially large amount towards insurance premium.