Essentials of a valid insurance

contract
1. Two parties
To constitute an insurance contract, there must be a
contract between two parties namely, insurer and
insured
2. Undertaking by insured
The insured person must undertake to make the
payment of premium without any default
3. Undertaking by insurer
Insurer must undertake to protect the insured from
loss or damages caused to the subject matter i.e. life
or property upon the happening of an event
4. Writing
The policy should contain terms and conditions in writing.
5. Offer and Acceptance
When applying for insurance, the insured gets the proposal
form of a particular insurance company. After filling in the
required details, the insured send the form to the insurer(i.e.
insurance company) with a premium check, sometimes.
This is the insured person’s offer. If the insurance company
accepts the offer and agrees to insure the insured person,
this is called acceptance.
Reverse also applicable
6. Consideration
Here, consideration is the premium or the future premiums
that the insured has to pay to the insurance company. For
insurers, consideration also refers to the money paid out to
the insured or insurance claim. This means each party to the
contract must provide some value to the relationship.
7. Legal Capacity
The insured needs to be legally competent to enter into an
agreement with his insurer. If the insured is a minor or is
mentally ill, then he may not be qualified to make contracts.
Similarly, insurers are considered to be competent if they are
licensed under the prevailing regulations that govern them.
8. Legal Purpose
If the purpose of insurance contract is to encourage illegal
activities, it is invalid. The object of the contract must be legal
and not against public policy.
9. Conclusive Evidence
When the insured pays the premium and the insurer accepts
the risk, the contract accepts the risk, the contract of insurance
is concluded. The policy issued by the insurer is the evidence
of the insurance contract
10. Principles of law of insurance
Insurance contracts are subject to certain
special basic principles evolved under law.
They are :
i. Utmost good faith
ii. Insurable interest
iii. Indemnity, subrogation and contribution
iv. Proximate cause
 CHARACTERISTICS OF INSURANCE
CONTRACT
1. As a risk distributing device:
The device of insurance serves to distribute the risk of economic loss among
as many as possible of those who are subject to the same kind of risk. This
broad sharing of economic risk is the principle of risk-distribution.
2. Contract of adhesion or fine print rule
Insurance is a contract of adhesion considering that most of the terms of the
contract do not result from negotiations between the parties as they are
prescribed by the insurer in printed form to which the insured may adhere
if he chooses but cannot change. Insurance contracts are of this type,
because the insurer writes and the insured either adheres to it or is denied
coverage.
3. Aleatory(Uncertain)
The obligation of the insurer to pay the proceeds of the insurance arises
only upon the happening of an event which is uncertain or which is to
occur at an indeterminate time, insurance contract of this type because,
depending upon chance or any number of uncertain outcomes, the
insurer may receive substantially more in claim proceeds that was paid
to the insurance company in premium.

4. Contract of indemnity
The contract of insurance is a contract of indemnity. It is basis of all the
property insurance. It means that the insured who has insurable interest
over property is only entitled to recover the amount of actual loss
sustained and burden is upon him to establish the amount of actual loss
5. Uberimae fides contract
A contract requiring perfect good faith. It requires the parties to
the contract of insurance to disclose any material fact, which the
applicant knows, or which he ought to know. Misrepresentations
and concealments should be avoided.
6. Personal Contract
Insurance contract are usually personal agreements between the
insurance company and the insured individual and are not
transferable to another person without insurer’s consent.
7. Principles of subrogation
The term subrogation means stepping into the shoes of others.
The doctrine of subrogation refers to the right of the insurer to
stand in the place of the insured, after settlement of a claim, in so
far as the insured’s right of recovery from an alternative source
involve.