CONTRACT OF INSURANCE

2.0 NATURE OF CONTRACT OF INSURANCE

2.1 THE CONTRACT

Insurance is a contract between two parties, i.e. the ‘provider’ and ‘buyer’ of the insurance. The provider is called insurer (e.g. insurance company), and the buyer is called the insured.

In this contract, the insurer agrees to indemnify the insured against a loss which may arise upon the occurrence of a particular event. The loss that is being insured is called the risk.

The consideration for the contract is two parties mutually exchange their respective contributions: the insurer undertakes to pay for future losses and the insured pay a premium.

2.2 POLICY

The document containing the terms of the contract of insurance is called a policy. Before a policy is issued to an insured, the insured will be given a cover note as evidence of temporary coverage until the insurance company decides whether to accept or reject the proposal from the buyer.

The buyer will make his proposal by filling up a form which contains questions such as:

• The description of the proposed insured
• The history of the proposed insured
• Subject matter to be insured
• Description of risk factor

2.3 PREMIUM

In order to be covered by a policy, the insured should have paid the premium, which is the price of insurance. Premium may be paid in lump sum or in installments.  Once the insurer has accepted the premium, it seems that the proposal has been accepted thus creating an insurance contract between the parties even though a policy has yet to be issued. Therefore, insurer will be liable for any loss under the policy. Then once the insurer has accepted the proposal, the contract is deemed complete.

In CANNING v FARQUHAR (1886) 16 QBD 727, Canning applied for life assurance and was told by the insurance company that no insurance contract could take place until the first premium was paid. Before the premium was paid, canning fell over a cliff and died. The company refused to accept the premium from Canning’s agent. The issue was whether the policy had lapsed because of the change in risk between the time of the original proposal and the payment of premium. It was held that the company was under no obligation to pay the sum insured because the risk had substantially changed between the time of the original proposal and the tendering of the premium.

2.4 RENEWAL OF POLICY

Before a policy expires, the insurer will send a renewal notice usually 28 days before the policy lapses. The renewal notice operates as an offer by the insurer to the insured, which will be considered to be accepted upon payment of a premium. Any change of risk will have to be notified to the insurer on renewal. The insured whose policy has expired will still be covered during the period between insurance renewal date and payment of premium - such duration is called grace period.