Key Elements of an Insurance Contract
Most people’s financial plans have been built around buying insurance, which gives them peace of mind that they may still be able to pay their bills if the “worst” happens.
A crucial protection for small business owners is liability insurance. It helps in defending you against accusations that the conduct of your company resulted in property damage and bodily injury.
Here, we’ll look at all the parts of an insurance contract that make it a legal document that both parties must follow.
- Offer and acceptance: When you or your company wants commercial insurance, you must fill out an application that the insurance company gives you. You may fill out the form online or have an agent or broker fill this form for you. *
Legally, the application is called an offer because the insured person offers to pay a certain amount for insurance coverage up to certain limits. Acceptance happens when the insurance company sends out the policy, or the agent or broker sends out a certificate of temporary coverage. *
- Legal consideration: This shows the insured agrees to pay in premiums and how much coverage the insurer may give in return. If an insurance company gets a claim covered by the policy, it pays for it subject to policy terms. *
- Competent parties: Insurance contracts are only valid for “competent parties” (both parties are of sound mind and body). The insured must be at least 18 years of age. The insurance company must be licensed in the state where the insured lives. *
- Free consent: Both parties must freely agree to the insurance contract for it to be valid. When the contract is signed, there can’t be any fraud, false statements, threats, or pressure. A mistake also means that the contract can’t be signed. *
- Insurable interest: The insured has an insurable interest in the person or thing being insured if they get money from it. If the item or person being insured passes away or is lost, damaged, or stolen, the insured may lose money. People who want to be insured can only get coverage for something that has something to do with insurance. *
- Good faith: This means neither party has lied, left out information, or did anything to mislead the other party.
- Facts: Facts that matter affect the risk that is taken. They include the things the insurance company needs to know to decide whether or not to cover the risk. If an insured wants life insurance, the insurer needs to know everything about the insured, like their age, height, weight, health, and occupation.
Similarly, for car insurance, the insurance company needs to know how old the policyholder is, the type of car (commercial or personal) and the driver’s record.
- Principle of Indemnity: Most types of insurance are based on the principle of indemnity. If a covered loss happens, the insurance company will compensate the insured with a cash settlement subject to policy terms. The idea may be that the insured person’s finances may be the same as before the loss. *
- Subrogation: Subrogation lets the insurance company go after a third-party that caused a covered loss to get money back.
For example, another driver crashes into the insured’s car and damages it. In that case, the policyholder’s insurance company will pay for the loss and then go after the other driver’s insurance company for payment.
According to the Indian Motor Vehicle Act, it is compulsory to have third-party commercial vehicle insurance for all commercial vehicles plying on the road. *
- Warranties: Warranties are the usual promises made in the insurance contract. They spell out the specific situations that can lead to a claim and what the insurance company may do in response to it.
- Conditions: Conditions are what decide if a claim can be paid or not. The most obvious thing that must be done is to pay the policy premiums. But an insurance policy also has many other terms.
Most insurance policies limit their coverage to a particular area and have specific rules about what the insured must do to get paid. The insurance company can only pay the claim if these conditions are met.
- Limitations: Limitations spell out the boundaries of insurance coverage. They may pay the maximum amounts for each type of loss. *
- Exclusions: Exclusions are exceptions to the insurance company’s rules to decide whether to pay a claim. For example, most life insurance companies won’t cover something unfortunate that may happen to you due to a war or a natural disaster. *
- Proximate Cause: The actual way a loss was made is called the “proximate cause”. The insurance company needs to know why a loss happened so it can determine if something covered by the policy caused it. *
* Standard T&C Apply
Attorneys make insurance contracts, which are complicated legal documents. They are used to set up a deal between an insured person and an insurance company and ensure that both people act fairly and honestly.
We’ve given you the basics here, but commercial insurance contracts usually take a lot of work for the average person to understand. Talk to your financial planner or insurance agent to learn about insurance contracts and how they might affect you.
‘Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.’