General Contract in Insurance

The valid contract, according to Section 10 of Indian Contract Act 1872, must have the following essentialities:

  1. Agreement (offer and acceptance)
  2. Legal consideration
  3. Competent to make contract
  4. Free consent
  5. Legal object

1. Offer and Acceptance

The offer for entering into contract may generally come from the insured. The insurer may also propose to make the contract.

Whether the offer is from the side of insurer or from the side of insured, the main fact is acceptance. Any act that precedes it is offer or a counter-offer.

All that precede the offer or counter-offer is an invitation to offer. In insurance, the publication of prospectus, the canvassing of the agents are invitations to offer.

When the prospect (the potential policy-holder) proposes to enter the contract it is an offer and if there is any alteration in the offer that would be counter-offer.

If this alteration or change (counter-offer) is accepted by the prospect, it would be an acceptance.

In absence of counter-offer, the acceptance of offer will be an acceptance by the insurer. At the moment, the notice of acceptance is given to the other party, it would be a valid acceptance.

2. Legal Consideration

The promise to pay a fixed sum at a given contingency is the insurer who must have some return or his promise.

It need not be money only but it must be valuable. It may be sums, right, interest profit, or benefit.

Premium being the valuable consideration must be given for starting the insurance contract. The amount of premium is not important to begin the contract. The fact is that without payment of premium, the insurance contract cannot start.

3. Competent to make contract

Every person is competent to contract :

(a) who is of the age of majority according to the law,
(b) who is of sound mind, and
(c) who is not disqualified from contracting by any law to which he is subject.

A minor is not competent to contract. A contract by a minor is void excepting contracts for necessaries. A minor cannot sign a contract.

A person is said to be of sound mind for the purpose of making a contract if at the time when he makes it, he is capable of understanding it and of forming a rational judgement as to its effect upon his interests.

A person who is usually of unsound mind, but, occasionally of sound mind may make a contract when he is of sound mind.

An alien enemy, an undischarged insolvent and criminals cannot enter into contract. Contract made by incompetent party/parties will be void.

4. Free Consent

Parties entering into the contract should enter into it by their free consent. The consent will be free when it is not caused by :

  1. coercion
  2. undue influence
  3. fraud
  4. misrepresentation
  5. mistake

When there is no free consent except fraud the contract becomes voidable at the option of the party whose consent was so caused.

In case of fraud the contract would be void.

The proposal for free consent must sign a declaration to this effect, the person explaining the subject matter of the proposal to the prospect must also accordingly make a written declaration on the proposal.

5. Legal Object

In order to make a valid contract, the object of the agreement should be lawful.

An object that is :

  1. not forbidden by law, or
  2. is nor immoral, or
  3. opposed to public policy, or
  4. which does not defeat the provision of any law, is lawful.

In proposal from the object of insurance is asked which should, be legal and the object should not be concealed.

If the object of an insurance, like the consideration, is found to be unlawful, the policy is void.