The Insurance Contract

The insurance contract is an agreement where one party obligates itself to make good the financial loss or damage sustained by a second party when a designated event occurs. The event must be fortuitous and happen by accident. The named insured must have insurable interest at the time of loss. One final point is that in order for any contract to be considered insurance, there must be a risk of loss.

FORTUITOUS EVENT
An occurrence largely beyond the control of any involved party; happening by chance; accidental; for example: fire, lightning, windstorm, explosion or flood.

INSURABLE INTEREST
In order to recover from a loss to property, the holder must have an insurable interest in the property at the time of the event or occurrence. An insurable interest is any right, title or interest in property where the holder of that right, title or interest sustains financial loss if the property is damaged or destroyed. Any lawful and substantial economic interest in the safety or preservation of the property from loss, destruction or damage also constitutes an insurable interest.

An entity does not have to be the property owner to have an insurable interest in it. Examples include, but are not limited to, mortgagees, trustees, vendors, lessees and bailees. Insurable interest for any entity must exist at the time the loss occurs.

RISK OF LOSS
If property could never be destroyed, there is no risk of loss. If property must necessarily disintegrate or be destroyed, there is no risk of loss. Between these two extremes is the exposure of risk that can be insured.

BINDERS (not mentioned in the policy)
A binder provides immediate coverage on a risk. A binder may be written or oral and is temporary evidence of coverage. It is issued to show evidence of insurance coverage subject to the policy being issued, is usually effective for a 30-day period and remains in force for this period of time unless cancelled or replaced by the actual policy.

Special Legal Concepts
Affecting Insurance Contracts

ADHESION
A contract of adhesion is basically one prepared by one party to be accepted by the second party. As a result, any ambiguity in the contract is construed against the preparer; in this case, the insurance company.