In insurance, an insurance policy is a binding and valid contract between the insurer and the insured (who was also known as the policyholder) outlining the terms and conditions of the insurance coverage being provided. In return for receiving a premium from the insured, the insurer agrees that, in the event of any insured peril or event that is specifically covered by the policy, he would pay for the damages. Because insurance caters to specific needs, an insurance policy will have some features that are not often found in other kinds of contracts. The policy is generally what is called an integrated contract that is to say that all the contracts that are required incorporated in the document.
Among the general features common to many kinds of insurance policies, the claim will be paid to the insured or a nominated beneficiary on the happening of an event defined in the policy. Insurance is distinguished by the principle of fortuity which means uncertainty. The uncertainty can relate to when the event will occur (for example, in the case of life insurance, death is certain but the time of death is uncertain) or whether the event will occur at all (in the case of fire insurance, the fire may never happen). Insurance contracts are often described as adhesive because the contract is drawn up by the insurer and the insured has little or no say in determining the contents. Insurance contracts may also be described as “aleatory” which means that the amounts exchanged between the insured and the insurer are not equal and are determined by uncertain future events that may or may not happen. This is contrary to most other kinds of business contracts where the amounts exchanged will be roughly equal.
The other general features of all insurance contracts are that they tend to be unilateral contracts where all the promises that can be enforced in law undertaken by the insurer. This means that if the insured has paid his premiums on time and otherwise meets the conditions of the insurance contract, the insurer is bound to pay. All kinds of insurance contracts are covered by the principle of “uberrima fides” which means utmost good faith. There is a duty on the insured to disclose every single material fact regarding the risk that is being covered. If this condition is breached, the insurer has the right to avoid the coverage. This again is in contrast to the principle of caveat emptor (buyer beware) that governs most commercial contracts.
The important parts of an insurance contract are as follows:
- declarations cover such facts as the name and address of the insured, the amount or value of the insurance, the premium to be paid and so on.
- definitions constitute the most important part of the policy because they determine what perils or risks are covered, the exact nature of the coverage and generally summaries the responsibilities of the insurer.
- exclusions are also important in that they describe what is not covered within the scope of the policy in terms of losses it will not be covered because of the happening of events that are not covered.