The Principle of Legal Insurance contracts
In all human endeavors there are rules if you like principles of doing them. The set of rules tend to distinguish an activity from other activities. Take for instance, the banking principles. A sound banking system would be anchored on principles of liquidity, safety, diversity, stability, profitability and efficient reserve management.
In a cooperative association, the principles include open membership, political and religious neutrality, and democratic control, limited interest on capital, patronage rebate, constant education of members, etc. insurance business being an economic activity has a number of legal principles distinguishing the business from any other types of businesses.
Modern insurance is a business, and of course, commercial contract between two parties; the insured and the insurer. The insured pays a relatively small amount of money called the premium to the insurer who undertakes to pay the sum insured event occurs within the specified period.
The terms and conditions of the contract are usually expressed in a document called POLICY. The process of doing this insurance business is highly complex, and various practices in underwriting, documentation and claims management have been standardized. Basic principles have been established and legalized to stand as the cornerstone of modern insurance business.
The basic principles of insurance are insurable interest utmost good faith, proximate cause, indemnity, subrogation and contribution.
A person cannot easily understand the practice of insurance without foremost understanding the fundamental legal principles of insurance. These settled fundamental insurance principles hardly change but can be and often have modified to serve the optimal objectives of insuring public.
The reasons for modifications in the
legal insurance principles are not unconnected with dynamism in the world we
live, changes in societal needs and attitudes from time to time.
Insurance as a Contract.
Insurance transactions are commercial contracts which fall under the general heading of simple contracts. This is because it is founded on price paid for by one party and the other party’s promise or undertaking. Thus, simple contracts must be supported by valuable consideration.
In insurance
contract, the insured pays the premium and insurer undertakes to pay sum
insured or it equivalent on the happening of the insured events in accordance
with the contractual stipulations. In effect, insurance contracts are governed by
all the essential principles of the law of contract just like every other
contract (an agreement legally binding on the parties and which is enforceable
by law).
The essentials of the law of contract include:
1. Offer and Acceptance: An offer means an expression of readiness to contract on the terms specified by the ‘offeror’ which if accepted will result in a binding contract. Acceptance, the other complement to offer, takes place when the party to whom an offer is made agrees, without counteroffer or attaching any other conditions, to the offeror’s proposal. In insurance contract, the offer is made by prospective insured.
He does this by means of a proposal form; if it is used. Proposal form is a document in which the insured presents to the insurer the requisite particulars of the subject-matter of insurance.
If proposal form is not used as is the case with large subject-matter of insurance like fire insurance on huge industrial complex, aviation and oil insurance, a certified and signed surveyor report on the proposed risk for insurance serves the function of the proposal form.
If
the offer is accepted unconditionally, then, there is a binding insurance
contract. Generally, the acceptance is indicated when the insurer accepts
unqualified, the initial premium paid by the prospective insured.
2. Consideration: Consideration means the price or
payment to be made by the parties to the contract to ensure that the contract
is enforceable and effective.
In insurance contract, consideration must be valuable and effective, that is, there must be undertaking to do something which one in the first instance is not obliged to do or to refrain from doing something which one is bound to do.
In practice the
insured pays the premium, and the insurer undertakes to pay the sum insured or
its equivalent which becomes payable on maturity of life insurance policy or when
the insured event occurs. In fact, the basic principles of insurance law demand
that where there is no payment of premium there is no insurance.
3. Intention to Create Legal Obligation: right from the beginning of any contract say an exchange of offer and acceptance, the parties to the contract must manifest a mutual intention to create a legal relationship between each other.
Thus, there
must be consensus ad idem (in complete agreement of mind) as to the legality of
the obligations the agreement will require from each party to the contract. The
parties to the contract must have understood and agreed on the details of the
contract which of course must be legal.
4. Legality
of the contract: Insurance contract being a commercial undertaking requires
that the transaction to be entered must be legal and not against public policy.
Hence, the general attitude of the courts is to declare void as against public policy
contracts with tendency to lead to crime, immorality or other effects
prejudicial to the public, therefore, an insurance contract tainted with
illegality such as smuggling, unlawful possession of property, suicide, arson
and insider acts leading to loss of financial interest in the subject-matter of
insurance is void and unenforceable by law.
5. Legal
capacity to contract: both parties to a contract must always have legal
capacity to contract for such a contract to be legally binding on them. The
parties to an insurance contract are the insured and insurer. The insurer, in
Nigeria, must be recognized as a person empowered by law to transact insurance
business. He may be either.
·
A company duly incorporated as a limited
liability company under or pursuant to the companies and Allied Matters Decree
1990, but no one person in such company shall hold more than 25 per cent of its
shares.
·
A co-operative insurance society registered
under any enactment or law relating to co-operative societies.
·
A mutual insurance companies.
In conclusion, every person has
the legal capacity to enter into a contract of insurance. However, there are
exceptions to the general rule as it has to do with minors, persons of unsound
mind, drunkards and enemy aliens.