The Faculty of International Business and

Economics

Insurance Contract
Legal Characteristics

The education of those

engaged in the important
functions of the insurance
business calls for an
understanding of the
essentials of insurance law
(Edwin W. Patterson)

Legal Requirements
Fundamental Legal
Principles
Basic parts of an insurance
contract

Cosmin Jolde, Univ. Lecturer

Agenda for today:

1. General Definition
2. Distinct Legal Characteristics of Insurance
Contracts

3. Legal Requirements of an Insurance Contract

4. Fundamental Legal Principles
5. Basic Parts of an Insurance Contract

1. General Definition
Complex legal documents that reflects the
general rules of law
Legal act between Insurer & Insured

Insurer is offering protection and is covering

the perils (risks), paying indemnity/certain
amount of money
Insured is transferring the perils (risks) and
is paying the premiums

2. Distinct Legal Characteristics of Insurance

Contracts

To show how insurance contract differ

from other contracts

Characteristics
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.

Aleatory
Unilateral
Conditional
Personal
Of adhesion
With obligations for all parts
Consensual
Unique
With successive execution
Pecuniary

a. Aleatory contract
The essence of an aleatory contract is
CHANCE or the occurrence of some
fortuitous event
Rather aleatory than commutative
ALEATORY the values exchanged are not
equal, one party may receive value out of all
proportion to the value that is given
COMMUTATIVE the values exchanged by
both parties are theoretically even

b. Unilateral contract
Only one party makes a legally
enforceable promise
Insurer -> to pay a claim or provide
other services to the insured
In contrast, most of the commercial
contracts are bilateral in nature

c. Conditional contract
The insurers obligation to pay a claim
depends on whether or not the insured or
the beneficiary has complied with all policy
conditions

CONDITIONS provisions inserted in the

policy that enumerate the rights and duties
of both parties
The insurer is not obligated to pay a claim if
the policy conditions are not met

d. Personal contract
The contract is between the insurer and the
insured
E.g. a property insurance contract does
not insure property, but the owner of
property against loss
The owner of the property is indemnified if
the property is damaged/destroyed

e. Contract of adhesion
The insured must accept the entire contract,
with all of its terms and conditions
There is no bargaining over terms ->
normally possible under most commercial
contracts
The courts have ruled that any ambiguities
or uncertainties in the contract are
construed against the insurer (Common Law
System)

3. Legal Requirements of an Insurance Contract

a. Offer and acceptance

b. Consideration
c. Competent parties (capacity of
contracting)
d. Legal purpose

a. Offer and acceptance

Must be an offer and an acceptance of
its terms first requirement of a
binding insurance contract

General rule the applicant for

insurance makes the offer, and the
company accepts or rejects the offer

b. Consideration
Refers to the value that each party gives to
the other
The insureds consideration payment of
the first premium / or a promise to pay the
first premium & an agreement to abide by
the conditions specified in the policy
The insurers consideration promise to do
certain things as specified in the contract:
Paying for a loss from an insured peril
Providing certain services (e.g. loss prevention,
safety services, defending the insured in a
liability lawsuit)

c. Competent parties
Each part must be legally competent

The parties must have legal capacity to enter

into a binding contract
Most adults are legally competent to enter
into insurance contracts, but there are some
exceptions: insane persons, intoxicated
persons, corporations that act outside the
scope of their authorized authority, minors
etc.

d. Legal purpose
The insurance contract that
encourages or promotes something
illegal or immoral is contrary to the
public interest and cannot be enforced

4. Fundamental Legal Principles

A. Principle of Indemnity
B. Principle of Insurable Interest
C. Principle of Subrogation
D. Principle of Utmost Good Faith
E. Causa proxima Proximate causa

A. Principle of Indemnity
The insured should not profit from a loss but
should be restored to approximately the
same position after the loss as existed
before the loss
Standard method of indemnifying the
insured in property insurance based on
actual cash value
Actual cash value = Replacement cost
Depreciation
Exceptions: valued policies, replacement
cost insurance and life insurance

B. Principle of Insurable Interest

The insured must stand to lose financially if
a loss occurs, or must incur some other kind
of harm if the loss take place
All insurance contracts must be supported
by an insurable interest to be legally
enforceable
3 purposes of the insurable risk
requirement:
To prevent gambling
To reduce moral hazard
To measure the amount of loss

C. Principle of Subrogation
Strongly supports the principle of
indemnity
Substitution of insurer in place of the
insured for the purpose of claiming
indemnity from a third person for the
loss covered by insurance;
The insurer is entitled to recover from a
negligent third party any loss
payments made to the insured;

Purposes of Subrogation
To prevent the insured from collecting
twice for the same loss

To hold the negligent person

responsible for the loss

Importance of Subrogation
The insurer can retain any amounts recovered
through subrogation only after the insured is fully
indemnified;
The insured cannot impair the insurers subrogation
rights;
The insurer can waive its subrogation rights in the
contract;
Subrogation does not apply to life insurance and to
most individual health insurance contracts;
The insurer cannot subrogate against its own
insurers.

D. Principle of Utmost Good Faith

A higher degree of honesty is

imposed on both parties to an
insurance contract than is imposed
on parties to other contracts;

The principle is supported by three

important legal doctrines:
a. Representations;
b. Concealment;
c. Warranty

a. Representations
Statements made by the applicant for insurance;

The insurer can avoid the policy if the

representation is both (1) material and (2) false
material if the insurer knew the true facts, the policy
would not have been issued, or would have been issued on
different terms

If the applicant for insurance states an opinion of

belief that later turns out to be wrong -> the insurer
must prove that the applicant spoke fraudulently
and intended to deceive the company before it can
avoid the policy (e.g. case of Mc-Dowell vs. Fraser in
1779)

b. Concealment
Failure of the applicant for insurance to reveal a
material fact to the insurer;
Nondisclosure the applicant for insurance is silent
& deliberately withholds material information from
the insurer;
The legal effect the contract is avoidable at the
insurers opinion;
The applicant for insurance is required to disclose
material information to the insurer even though the
disclosure may result in denial of the insurance, or
require the payment of higher premiums

c. Warranty
The clause in an insurance contract that prescribes,
as a condition of the insurers liability, the existence
of a fact affecting the risk (e.g. the existence of an
operational alarm system);
The clause describing the warranty becomes part of
the contract
Any breach of the warranty, even minor or not
material, allows the insurer to avoid the policy;

The harsh common law doctrine of warranty has

been modified and softened by court decisions and
statues.

Law and the insurance agent

An insurance contract normally is sold by an
agent who represents the principal
There are three general rules of agency that
govern the actions of agents and their
relationship to insured:
There is no presumption of an agency relationship
An agent must have the authority to bind the principal
A principal is responsible for the actions of the agents

An agent can bind the principal based on

expressed powers or implied powers

E. Causa proxima Proximate cause

Active and effective cause determining

a loss without the intervention of
another independent force, determined
by a new source
it is not the 1st or the last, but the
dominant, effective and active
Direct link cause & effect

F. Contribution
Co-participation of many insurers to
the same loss
If the insured is coved more than once
for the same risk

5. Basic Parts of an Insurance Contract

5.1 Main clauses

5.2 Contractual parts
5.3 Specific compulsory elements
5.4 Phases of contracting
5.5 Effects of the contract
5.5 The end of the contract

5.1 Main clauses (I)

Insurance contracts generally can be
divided into the following parts:

Declarations
Definitions
Insuring agreement
Exclusions
Miscellaneous provisions

5.1 Main clauses (II)

Declarations are statements concerning the
property or activity to be insured
The definitions page or section defines the
key words or phrases so that the coverage
under the policy can be determined more
easily;
The insured agreement summarizes the
promises of the insurer. There are two basic
types of insuring agreements:
Named-perils coverage
All-risks coverage

5.1 Main clauses (III)

All policies contain one or more exclusions.
There are three major types of exclusions:
Excluded perils
Excluded losses
Excluded property

Exclusions are necessary for several

reasons:
The peril may be considered uninsurable by private
insurers;
Extraordinary hazards may be present;
Coverage is provided by other contracts;
Moral hazard is present to a high degree;
The coverage is not needed by the typical insured

5.1 Main clauses (IV)

Conditions are provisions that qualify or
place limitations on the insurers promise to
perform. The conditions section imposes
certain duties on the insured if he or she
wishes to collect for a loss

Miscellaneous provisions in property and

liability insurance include cancellation,
subrogation, requirements if a loss occurs,
assignment of the policy, and other
insurance provisions.

5.2 Contractual parts

Insurer and insured
Within contract, may be interested:
Contracted of the insurance when the
contract is done for a 3rd party)
Insured
Beneficiary
The person mentioned within contract
(the case of the 3rd part liability
contracts)

5.3 Specific compulsory elements

A. Risk
B. Sum Insured
C. Premium

A. Risk
Uncertain, possible and future event
Goods, patrimony, life, helth and
phisical integrit of a person may be
exposed to the risks
Insured risk conditions:
Possibility to be produced
To be aleatory
The event must be produced independently of
the wish of insured or insurance beneficiary
To be moral (some risks cant be insured
because they are incompatible with & society)

B. Sum Insured
Maxim amount of claims paid by insurer,
following the producing of risk
Contribute to the calculation of premiums
Differences Non life vs. Life:
For non life insurance the good is evaluated
For life insurance is settled

C. Premium
Received by insurer
Paid by insured, transferring risks, in exchange of
protection promised in the case of loss (if the
agreed risks are produced)
There are many factors that may influence the level
of the premium
Gross Premium = Net Premium + Premium adaosul
de prim
Types of premium:

Effective (current)
Fixed
Premium tariffs
Premium discounts

What is Insurance?

POOL

The insurers
benefit
from the law of
large numbers

Equitable Premiums

Claims

The contributions of the many to meet the losses of the few

Calculation of Premiums

Premium = Sum Insured X Rate

Value of
Property
at risk

Reflects the
Degree of
Hazard
% or 0/00

Calculation of Premium

The rate per cent is set by the leading underwriter,

based on the likelihood of having to pay a claim.
The greater the risk (chance of loss) the higher the
rate charged
Per mille, pounds
per thousand
insured

E.g. A rate of 1.5% means

that 1.50 is charged
for every 100 of risk
insured.

Premium Calculations

Losses (actual claims made)

X100 = Rate%

Values at risk (total possible claims)

E.g. 450m worth of property insured gives rise to 9m claims:

9,000,000

450,000,000

X 100 =

9
=

450

2%

Premium Calculations

The premium must be, at the very

least, sufficient to meet all
expected claims!

Prem.

Claims

and the premium must

also cover
expenses and overheads!

The insurance cycle and financial performance

higher profits
Higher prices

higher capacity for that class

Capacity withdrawn

Lower profits

lower prices

5.4 Phases of contracting

Request (declaration) of insurance

Request (declaration) of insurance
analysis
Insurer -> obliges contracting risks
The moment when contract is signed
The implementation of contract -> time

5.5 Effects of the contract

The rights and obligations of insured
till the insured risk is produced
after the insured risk is produced

The rights and obligations of insurer

till the insured risk is produced
after the insured risk is produced

5.5 The end of the contract

Usual ways:
To get to the end
The insured risk is produced

Unusual ways:
Denunciation, resolution and annulations
of the contract

Legislatie
Cod Civil
Cod Comercial
Legea privind asigurarile si reasigurarile in Romania, nr.
136 / 29.12.1995
Legea 32/2000 privind societatile de asigurare

Thank you for your

time &
consideration!