Insurance Contracts: When Do They Begin?

An insurance contract is a legally binding agreement between the insurance company (the insurer) and the person(s), business, or entity being insured (the insured). The contract is typically represented by a policy document, which outlines the terms of the insurance contract. This document is essential, as it helps the insured verify that the policy meets their needs and understand their responsibilities and those of the insurance company in the event of a loss.

The beginning of an insurance contract can be considered the offer and acceptance stage, where the insured makes an application to the insurance company, and the company accepts it. This is also known as a meeting of the minds, where both parties agree to the terms of the contract.

Offer and acceptance

If the insurer accepts the offer, the effective date of the policy is typically the date the payment was accepted. In some cases, the insurer may accept an offer without a premium payment, and the effective date would then be the date the insurer issues the policy. It is important to note that the insurance agent usually has the authority to accept the offer on behalf of the insurance company, binding the company to the contract.

If the insurer rejects the offer, they may make revisions and counter-offer to the applicant, who then has the choice to accept the new terms and conditions. The insurer is not bound to the contract until they accept the application.

In the case of life insurance, the process is slightly different. The applicant fills out the application and pays the first premium. They are then given a conditional premium receipt, and the life insurance becomes effective from the date of the application or the date of the medical examination, provided the applicant meets the company's underwriting standards. If the premium is not paid with the application, the insurance will become effective when the policy is delivered and the premium is collected, provided the applicant is in good health at that time.

Consideration

In an insurance contract, the insured agrees to pay regular premiums to the insurer. The premium amount is typically determined based on various factors, such as age, location, and the type of insurance (e.g., health, life, auto, etc.). The premium may be paid in a lump sum or through periodic payments, such as annually, semi-annually, quarterly, or monthly.

In return, the insurer agrees to provide financial protection or reimbursement to the insured in the event of specified losses or damages. This promise to pay future claims is the insurer's consideration in the contract. It is important to note that the insurer's consideration is not just the potential future payout but also the assurance of coverage and the assumption of risk.

The principle of consideration ensures that both parties have a valid and enforceable agreement. Without consideration, a contract may not be legally valid, and the obligations of the parties may not be enforceable in a court of law. Therefore, consideration is a critical element that forms the basis of the insurance contract and protects the interests of both the insured and the insurer.

When entering into an insurance contract, it is essential to understand the specific terms and conditions, including the premium amount, coverage, exclusions, and claims process. Reading and comprehending the entire policy helps ensure that both parties are aware of their rights and responsibilities and can avoid potential disagreements or disputes in the future.

Legal capacity

To have the legal capacity to contract, individuals must be of sound mind and not suffer from any mental illness or condition that impairs their judgement, such as schizophrenia. The court may perform cognitive and motivation tests to determine an individual's legal capacity. The former assesses an individual's reasoning and language comprehension, while the latter evaluates whether an individual suffers from delusions or mania, which could distort their understanding of the contract.

Minors, mentally or physically incapacitated persons, and those under the influence of drugs or alcohol typically lack the legal capacity to contract. Contracts involving minors are voidable, and courts will not punish them for failing to uphold their end of the bargain. However, they may be asked to return any goods or benefits received. Mentally or physically incapacitated persons are those who cannot comprehend the terms and their rights and obligations under the contract. This determination is made on a case-by-case basis, unless a court has already declared the person mentally incapacitated.

Insurers are considered legally competent if they are licensed under the prevailing regulations that govern them.

Legal purpose

For an insurance contract to be valid, it must have a legal purpose. This means that if the purpose of the contract is to encourage illegal activities, it is invalid.

In other words, the courts will not enforce a contract that is not legal. For example, a contract for the provision of illegal services would not be considered a legal and valid contract because the court would not enforce it.

Therefore, it is essential to ensure that the purpose of the insurance contract is legal and complies with the relevant laws and regulations. Both parties must understand the terms and conditions of the contract and agree to them.

The doctrine of utmost good faith

In the context of insurance contracts, the doctrine of utmost good faith requires insurance agents and applicants to disclose relevant information. Insurance agents must reveal critical details about the contract and its terms, while applicants are required to provide honest answers to all questions. This includes disclosing personal information such as medical history, health conditions, and habits like smoking, which can impact the risk associated with the policy. Applicants must also disclose if they have been refused insurance coverage in the past.

Frequently asked questions