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.
CONTRACT OF INSURANCE
Reviewed by Kamaruddin Mahmood
on
12:23:00 PG
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