What are the 10 Important Features of an Insurance Contract?
Important features of an insurance contract are those bases, qualities, and characteristics that an insurance business possesses that make it different from any other legally binding contract.
Anytime these important features are violated, the insurance policy can be voided. It is these important features of the insurance contract that made it different from other commercial contracts, it is the only insurance that has these important features and such has clearly differentiated it from all other forms of contracts, such special features include the following:
An insurance contract is conditional in that the insurer’s promise to pay befits is relatively dependent on (or a condition of ) the occurrence of the risk assured against. If the risk does not materialize, no benefits are paid. If furthermore, an insurance contract is also dependent on certain acts by the policy owner, such as the payments of premium, supplying proof of death or disability, and much other evidence of claims.
The obligation of the seller is conditional and is only triggered if and when the insured loss happens. If the insured loss never occurs, the buyer does not get anything. This implies that for an insurance contract to be effective and void of revocation, the necessary conditions behind the establishment of the contracts must be met.
(b) Utmost Good Faith:
Utmost good faith is one of the primary features of the insurance contract. This is because both the policy owner and the insurer must know all material facts and necessary information. However, there should be zero attempts by either of the party to conceal, deceive or disguise.
Involvement with these is the concept of warranties, representation, and concealment. Therefore, insurance should be geared towards increasing the productivity of the community by eliminating worry and increasing initiative. The uncertainty is changed into certainty by insuring property and life because the insurer promises to pay a definite sum at damage or death.
(c) Insurable Interest:
Insurable interest is one of the primary elements of insurance contracts that differentiate insurance contracts from another legal binding. Insurable interest entails that the person acquiring the contract must be subject to loss upon the death, illness, or disability of the person being insured.
A policy obtained by a person not having an insurable interest in the insured is not valid and cannot be enforced. However, insurable interest must exist between the applicant and the individual being insured, when the applicant is the same as the person to be insured, there is no question that insurable interest exists.
Also, a person is said to have an insurable interest, in the property or life of any person, provided the loss or damage caused to the property or life directly affects him or her. Take, for instance, a husband who has an insurable interest in his wife and the same with the wife in her husband.
A shopkeeper has an insurable interest in the stock kept in his shop. A manufacturer has an insurable interest in the products he manufactures. A security agent has an insurable interest in the property kept under his care. e.t.c
(d) Values, Reimbursement, or indemnity:
A reimbursement contract offsets the insured for the amount of the loss incurred within the duration of the contract. However, Life insurance is not the same as a contract of indemnity. It is a contingent contract where the probability of an event (death) happening is one (certain) but it is a question of time.
Hence, the insurance company cannot guarantee against death or prevent death but can agree to pay a stipulated sum in the event of death happening at an earlier date than agreed upon. When a person takes life insurance, he nominates his dependents to receive the policy amount in the event of his death, prior to the stipulated or agreed period.
A warranty in an insurance contract is a statement made by the applicants that are guaranteed to be true. it becomes part of the contract and if found to be untrue, can be grounds for revoking the contract. Warranties are presumed to be material because they affect the insurer’s decision to accept or reject an applicant.
Subrogation means stepping into the shoes of another person. When the insurance company pays full compensation to the insured, it takes over the ownership of the goods insured and will enjoy the complete right of taking necessary legal steps to claim compensation from such persons who are responsible for the loss suffered.
For example, a cotton mill is destroyed by a fire that is caused by sabotage. Here, the insurance company after paying full compensation to the extent of the insured sum will step into the shoes of the cotton company and initiate criminal action against those persons responsible for sabotage so that it can claim due compensation.
Similarly, if a ship is totally destroyed, the insurance company will pay the necessary compensation to the shipping company and later the insurance company will salvage the items left on the ship.
(g) Unilateral Feature:
Insurance is a unilateral contract in that only one party the insurer makes any kind of enforceable promise. The insurer promises to pay benefits upon the happening of a particular event. such as death, or disability in life assurance policies.
The applicant makes no such promise, he or she does not even promise to pay a premium, and the insurer cannot require that they be paid. Of course, the insurer can cancel the contract if premiums are not paid. A unilateral contract can be contrasted to a bilateral contract, in which each contracting party makes enforceable promises.
Insurance contracts are aleatory such that there is an element of chance for both of the contracting parties and the dollar value exchange may not be equal. simply stated the benefit paid.
For example, an individual who has a disability insurance policy will collect benefits if he or she becomes disabled; if no disability strikes, no benefits are paid. The opposite of an aleatory contract is no element of chance and the parties exchange goods of equal value.
This talks about a particular statement made by an insurance application that he/she presumes to be true. It is used by the insurer to critically evaluate whether or not to issue a policy. Unlike warranties, representation is not part of the contract and needs to be true, only to the extent that they are material and related to the risk.
Most states require that life insurance policies contain a provision that all statements made in the application be deemed a representation, not warranties.
(j) Risk Management and sharing:
Insurance is a device to share the financial losses which might befall an individual or his family on the happening of a particular event.
The event may be the death of a breadwinner to the family in the case of life insurance, marine-perils in marine insurance, fire in fire insurance, and other certain events in general insurance, e.g., theft in burglary insurance, accident in motor insurance, etc. The loss arising nom these events if insured is shared by all the insured in the form of a premium.
Having highlighted the various important features of an insurance contract that differentiated it from other legal binding, it is very important to note that insurance is not a charity business. However, charity is given without consideration but insurance is not possible without a premium.
It provides security and safety to an individual and to society although it is a kind of business because in consideration of premium it guarantees the payment of loss. It is a profession because it provides adequate sources at the time of disasters only by charging a nominal premium for the service. We have explained all you needed to know about the 10 important features of the insurance contract.