Since the life insurance contract is a sort of contract it is approved by the Indian Contract Act.
According to Section 2(H) and Section 10 of Indian Contract Act, the valid contracts must have the following essentialities:
- Agreement (offer and acceptance)
- Competency of the parties
- Free consent of the parties, i.e., the parties must be ad. idem.
- Legal consideration
- Legal objective
1. Offer and Acceptance
An offer or proposal is an intimation to another of one’s intention to do or to abstain from doing anything with a view to obtaining the assent of that other person to such and act or abstinence.
When the person to whom the proposal or offer is made signifies his assent to it, the offer is said to be accepted.
The offer and acceptance in life insurance is of typical nature. The proposal form is completed by the prosper and along with the proposal from first premium is paid. The same may be accepted at normal rates and terms.
The Agents’ canvassing or publication of prospects and of uses of insurance constitute invitation to offer because the public in general and individual in particular are invited to make proposal for insurance.
Submission of proposal along with the premium is an offer and the despatch of acceptance-letter is the acceptance.
The risk will commence as soon as the acceptance letter is despatched by the insurer.
When proposal is not accompanied with the first premium , it would be an invitation to offer by the prospect and the letter of insurer (generally acceptance letter with modification is sent) asking the prosper to pay the first premium without any alteration is an offer and the payment of first premium by the prospect is acceptance.
As soon as premium is despatched, acceptance is made provided there was no alteration in the terms and conditions.
Another case may be when the insurer desires to accept the proposal only on certain modifications. The letter (generally the acceptance letter) sent to the proposal about the desire of change in terms and conditions is an offer if the first premium was not sent along with the proposal.
But if the first premium was sent along with the proposal, it would be a counter-offer.
If the prospect accepts the terms and conditions and send the first premium if the premium was not already sent, it would be an acceptance.
Thus, the acceptance letter sent by the insurer is not always acceptance.
It would be acceptance only when the first premium was accompanied with the proposal and the proposal is acceptable on normal rates and terms.
In other cases it would be an offer or counter-offer.
2. Competency of the Parties
The essential element of a valid contract is that the parties to, it must be legally competent to contract. Every person is competent to contract who is :
(1) of the age of majority according to the law,
(2) who is of sound mind, and
(3) who is not disqualified from contracting by any law.
The insurer will be competent to contract if he has got the licence to carry on insurance business. The insurer is working within the Article of Association and Memorandum of Association or the Deeds of Partnership.
Majority is attained when a person completes the age of 18 years. A minor is not competent to contract. A contract by a minor is void excepting contracts for necessaries.
The minor can repudiate the contract at any time during his minority. If the life insurance policy is issued to a minor, the insurer cannot repudiate it but the minor can repudiate it during his minority.
At the attainment of majority, he has to exercise the option, within a reasonable time, whether he would continue to carry on the policy or not.
Generally, insurer accepts the proposal forms completed by the guardians of the minors.
So, the incompetency of contract does not arise.
Person of Sound Mind
Persons of sound mind can enter into 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.
A person usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind. So, an intoxicated person cannot enter into a contract. The contract may be voidable at his option, but in order to be avoided, it must be repudiated by the insured within a reasonable time of his becoming sober.
Similarly, when an originally valid contract has been entered into, it will not be affected by one of the parties becoming lunatic afterwards.
A contract with an alien enemy is void. An alien enemy is disqualified from, and is capable of, entering into contract or enforcing it.
When an alien with whom an insurance contract has been entered into becomes an enemy afterwards, the contract is either suspended or terminated as from the declaration of war.
3. Free Consent of the Parties
Both parties must be of the same mind at the time of contract. If the two parties do not meet in this respect, there is no perfect agreement between them.
It is necessary to call it free consent of parties that the contract is not made (consent is not obtained) through coercion, undue influence, fraud, misrepresentation or mistake.
In life insurance, both parties must know the exact nature of the risk to be underwritten.
If the consent is not free, the contract is generally voidable at the option of the party whose consent was not freely given.
According to Section 13 two persons are said to consent freely when they agree upon the same thing in the same sense.
4. Legal Consideration
The presence of a lawful consideration is essential for a legal contract. The insurer must have some consideration in return of his promise to pay a fixed sum at maturity or death whichever may be the case.
The consideration need not be the money only. It should be anything valuable or to which value may be assigned. It may be interest, right, dividend, etc.
In Raj Narain vs. Hindustan Co-operative Insurance the insurance was accepted and the premium was paid but the policy was not issued by the insurers.
The insured died and could get the policy amount in allegiance of policy because at the payment of premiums contract was complete.
The first premium is considered and subsequent premiums are merely conditions to contract.
5. Legal Objective
The contract would be legal only when the object is legal. The object of a legal life insurance contract is to protect oneself or one’s family against financial losses at the death of the insured.
The contract is, sometimes, to provide for financial emergencies that may occur in old age.
In brief the contract will be lawful only when the objective is legal. The objective will be legal only when there is insurable interest.
Without having the interest, the object of the contract would not be legal. It would be wager contract and against public policy.