INSURANCE CONTRACT BASICS

People enter into insurance contracts for the protection these contracts provide.  Contracts can be made orally or in writing. To eliminate disputes as to whether a contract existed, it is recommended that contracts having significant or long term obligations be made in writing.

Parties to the Contract: There are at least two parties to every contract regardless of its purpose. In property insurance contracts, these parties include:
– the insurer, and
– the insured.

EXAMPLE: Last week, Alex and Olivia Gregory completed an application for insurance for their home. The application was sent to the XYZ Insurance Company. They received their insurance policy yesterday. Both the Gregorys and the insurance company are considered to be parties to the contract.

The party that drafted the contract is generally considered to be the “first” party. In this case, that would be the XYZ Insurance Company. The other party, the Gregorys, is considered to be the “second” party.

There are people who are not considered to be a party to the contract but who are entitled to make a claim against it. These people are known as third party claimants. Liability insurance policies are an example of insurance contracts that provide for payment of claims directly to third parties.

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Five Essential Elements Required of All Contracts

A contract is a legal agreement between two or more parties that is enforceable at law.  There is not much sense having a contract if it is not enforceable at law. In order for a contract, regardless of its purpose, to be legal and, hence, binding on all parties, it must contain five essential elements, including:

(1) AGREEMENT

For agreement to exist there must have been a meeting of the minds between the parties as to:
–    the subject matter of the contract, and
–    its terms and conditions.
The term “meeting of the minds” is a legal term indicating that the parties know what the substance and terms of the contract are and that neither party has withheld information that should be known by the other party.

A definite offer must be communicated by one party to the other.

EXAMPLE: John Mandin saw a used ATV for sale in the newspaper. He called the owner saying that he liked it and that he might offer him the asking price when he came to see it later that day. The owner told him that he could come by any time. Later that day, the owner sold the ATV to another person. John was furious. He insisted that he had made an offer equal to the asking price and that the owner had led him to believe it was his for that price. In this case, a definite offer was not made. John indicated that he “might” buy the ATV for the asking price subject to the condition that he sees it first.  

That offer must be unconditionally accepted by the other party.

EXAMPLE: i) A person looking to buy a home offers the seller $5,000 less than the listed price. The seller then advises the party making the offer that they will drop their asking price by $2,500.
ii) The applicant for insurance requested a policy with a $500 deductible. Today, the insurance company advised the applicant that the minimum deductible it was prepared accept for the property being insured was $1,000.

In these instances, there is no agreement. Instead, the seller of the home and the insurance company have made what is known as a counter-offer. A counter-offer makes the original offer invalid. If the person making the original offer decides not to accept the counter-offer, the process is over. However, if he or she still wants to establish a contract, the negotiating may begin all over again.

So long as this negotiation process is continuing, there is no agreement. Agreement exists only when one party unconditionally accepts the offer of the other party.

Once accepted, the offer cannot be withdrawn. However, once an insurance contract has been issued, it can be cancelled in accordance with the termination provisions included in it.

EXAMPLE: Last Monday morning, the insurance company underwriter informed the broker that the company would provide Mike’s Auto Body Inc. with a contract of insurance. However, that same afternoon the underwriter called the broker to tell her that he had thought about it some more and that he has made the decision to withdraw his acceptance of the offer made by the owner in his insurance application. According to contract law, the underwriter cannot do that. However, after the policy has been issued, the insurance company can exercise its right to cancel the policy by providing Mike’s Auto Body Inc. with proper notification as described in the that contract. 

The offer and acceptance do not need to be in writing. In law, an oral agreement is as binding on the parties as is a written agreement.

The best way to avoid misunderstandings about the terms of the contract is to ensure that the offer and acceptance are provided in writing.

In the business of insurance, the application for insurance constitutes an offer. The issuing of the policy as applied for constitutes acceptance of that offer by the insurance company

When the application for insurance is in writing, the policy must be issued exactly as applied for. If the insurance company decides to make any changes, it must advise the applicant in writing of those changes.

The insured doesn’t have to accept the policy. if they don’t want to. In contract law, a person has up to two weeks (no time limit in Quebec) to reject the contract after receiving notification of the changes. If the insured does not do that, he or she is considered to have agreed to the changes.

 If the insurance company does not provide the insured with written notification pointing out the difference between the insurance asked for on the application and the insurance that was actually provided on the policy, the insured may have a right to the coverage as applied for.

EXAMPLE: The insurance company issued the Olsen’s homeowner’s policy without the sewer back-up coverage requested by them on their application. The insurance company did not provide the Olsens with written notification of this reduction in coverage. Three weeks after having received the policy, the Olsens had a $30,000 sewer back-up loss. In this situation, the insurance company would in all likelihood be ordered to pay that claim. However, if the loss occurred six months after the Olsens had received the policy, the insurance company may well argue that they had sufficient time to notice the reduction in coverage and that they agreed to the change.

Normally, these kinds of oversights will not occur. This is because brokers and brokerage staff review all new policies to ensure they have been issued in accordance with the application. That is standard operating procedure in all brokerages.

(2) Legal Capacity to Contract

All individuals wishing to enter into a contract must be recognized at law as being entitled to do so. This generally includes all persons over 18 years of age. These persons are seen in law as having the legal capacity to contract with others.

Note: In Saskatchewan, a person who has attained the age of 16 years is considered to have the capacity of a person of 18 years to make an enforceable contract of insurance.

[Section 64, Insurance Act]

i) Minors are persons who are considered to be under the age of legal competence. That means they do not have the right to enter into a legal contract. In most provinces, minors include all persons less than 18 years of age.

This limitation helps to prevent the exploitation of people who often do not have the experience or sophistication required to properly protect themselves in business matters.

(ii) However, minors do have the restricted right to enter into contracts for the necessities of life such as food, clothing and lodging or other contracts made for their benefit.

This information is an excerpt from CHAPTER 2 of the ILS Level 1 General and Adjuster Insurance Licensing Program (L1).  ILS L1 program is the most up to date provincial level 1 insurance licensing program available and contains everything you need in one package to successfully pass your level 1 insurance licensing provincial exam.

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