Insurance Law : Formation of Contract

An insurance policy or some say contract, is subject to the rules generally applicable to other common law contracts since it is in itself, a type of contract albeit with its special features. To become a binding contract, there must be some elements in the insurance policy to give it legal effect. All these elements must be present before the contract could be enforceable and comes into legal effect. In most cases, insurance policies are reduced into writing especially in this day and age and therefore, it could be easily ascertained whether all the elements required have been satisfied. It was not so in the early days when parties trusted each other's mere words. Let us now examine some of the features of the insurance contract which form the insurance contract as a whole.

Offer and Acceptance
Just like a common law contract, an insurance contract must have the elements of offer and acceptance. This is normally seen where the person who wishes to take out an insurance policy makes an offer by way of a proposal form and the insurance company reverts with an acceptance after evaluating the risk proposed to be insured. In most cases, the acceptance by the insurance company is conditional upon the person paying the quoted insurance premium. If the person fails to pay the quoted insurance premium, the conditional acceptance by the insurance company lapses and no insurance coverage is afforded. Apart from the same, the parties namely the person taking out the insurance and the insurance company must also come to an agreement on the terms governing the insurance policy. Unless the parties come into agreement on the operative terms governing the insurance policy, no contract of insurance comes into being.

Privity of Contract
At common law, it is a general rule that only parties to a contract may sue on the contract. Therefore, in the case of an insurance policy, only the policy holder can sue on the insurance policy and not the beneficiary of the insurance policy unless the terms in the policy give this right to the beneficiary. In some jurisdictions, this right has been modified for example in Singapore, by the Contracts (Rights of Third Parties) Act - Cap. 53B, Statutes of the Republic of Singapore, Rev. Ed 2002. This modification of the general rule on privity of contract allows the beneficiary who is not a party to the contract of insurance to enforce the rights available under the insurance policy directly against the insurance company when previously he is unable to do so. This comes in handy especially in situations where the policy holder becomes invalid or refuses to cooperate by filing an insurance claim.

Consideration For Contract
One salient requirement for the contract of insurance to be legally enforceable is the presence of consideration moving from the person who is taking out the insurance to the insurance company. The consideration is usually the insurance premium which the insured would need to pay before the insurance contract takes legal effect. Even so, if actual payment of premium is not expressly stipulated to be a pre-condition to the formation of the insurance contract, then the insurance contract may still be enforceable. In any event, the premium payable must be ascertainable and unambiguous.

Duration of Insurance Cover
Every insurance policy will stipulate the duration of insurance cover provided by the insurance company. Where a specified duration is stipulated, the insurance company will afford insurance coverage until the last day specified in the insurance policy. Usually, insurance companies will stipulate unambiguously that coverage is from X date until Y date with Y date inclusive. It is also common for the time to be stipulated eg. up to midnight. Having a clear stipulation of the duration of insurance cover prevents and reduces the likelihood of misunderstanding on the period of insurance coverage.