How General Rules of Contracts Apply to Insurance Contracts

The parties to the contract must be legally competent and capable of contracting.

The insurance company is a legal entity capable of contracting through its authorized agents. The individual entering into the contract with the insurance company must also be legally capable. As a result, and as an example, an insurance policy offered to and accepted by a child is not legally enforceable. The contract must be based on an offer made by one party and an acceptance of that offer on the same terms by the other party.

There must be equal knowledge by both parties of all material and relevant facts.

The insured must not conceal or misrepresent any material fact when submitting the risk to the company. In addition, the insured must comply with any and all warranties and representations made when the policy is issued and throughout the time the policy is in force.

Concealment

is the failure to disclose a material fact. If the material fact had been disclosed at the time coverage was requested, the insurance company would have declined to write the risk or to write it on the basis requested. Concealment is not limited to concealment of a fact about which a question is asked. As an example, if a property owner knew that the property was in imminent danger of destruction and still applied for insurance on it without disclosing that fact to the insurance company, the policy might be unenforceable because of the concealment.

Misrepresentation

is a false statement about a past or present fact made to an insurance company. Like concealment, the false statement must be of a material fact in order to constitute misrepresentation. Misrepresentation is a positive act. Concealment is a negative act.

Warranty

is a provision in a policy that requires existence of a condition that reduces the risk of loss. The insured might warrant that the premise is protected by a burglar alarm or that an automatic sprinkler system is maintained in proper working order. On the other hand, a warranty might provide for the nonexistence of a condition that increases the risk of loss. Examples of this include a requirement that the premise not be used for any manufacturing purposes or that a vehicle not be driven beyond a 50-mile radius. In general, a warranty in an insurance policy requires strict compliance on the part of the insured. Any breach of the warranty conditions voids the insurance policy.

A contract must be based on a valuable consideration.

For the insured, the consideration is the premium payment, although failure to pay a premium does not automatically invalidate a policy. The policy remains in force until cancelled in accordance with the terms of the policy.

For the insurance company, the consideration is its promise to pay for covered losses or to honor other obligations made in the policy.

A contract must be legal in form.

When an insurance policy is issued, it is legal in form and sometimes includes requirements and conditions mandated by the state.

A contract must be for a legal purpose.

Insurance cannot be for a purpose such as gambling, for the benefit of an improper insurable interest, or for a fraudulent purpose.