Insurance Contract Principles

A property or liability insurance policy is a "personal contract," a "conditional contract," a "unilateral

contract," a "contract of adhesion," a "contract of indemnity," and a contract which requires that the
person insured have an insurable interest at the time of the insured-against contingency.

Further: An Insurance Contract is one of Uberrima fides. This is a Latin phrase meaning "utmost good
faith" (or translated literally, "most abundant faith"). It is the name of a legal doctrine which governs
insurance contracts.

This means that all parties to an insurance contract must deal in utmost good faith, making a full
declaration of all material facts in the insurance proposal. Under utmost good faith contracts if there is a
violation it is categorized as a material misrepresentation, a breach of a warranty, or a concealment.
Insureds can also go after insurers for a breach of utmost good faith. Normal business contracts are
"good faith contracts" and can result in contract enforcement, monetary damages or both. If the contract
cannot be performed or is unconsionable, the contract can be set aside. This contrasts with the legal
doctrine of caveat emptor (let the buyer beware). Caveat emptor does not come into play in insurance
contracts. The buyer does have an obligation to read the contract and if is not understood to ask the
sales agent to explain. It is best to get the explanations in writing.

Conditional Contract
Property and liability insurance policies are said to be "conditional contracts" because the obligation of
the insurer to perform is conditional upon an event happening. Compare this to entering into a contract to
build a house. Both parties must perform. Build and payment. This is not conditional.

Unilateral Contract
Only one party is legally bound to contractual obligations after the premium is paid to the insurer. Only the
insurer has made a promise of future performance, and only the insurer can be sued for breach of
contract. However, in order for an insured to collect, the insured must perform according to the contract. If
the insured does not perform then the insurance company does not have to perform. This is mainly
covered in a section called "Duties after a loss" found in insurance contracts.

Contract of Adhesion
Property and liability insurance policies are said to be "contracts of adhesion" because the insurer and
insured parties are generally of unequal bargaining power where the insured party cannot negotiate the
terms of the contract and must take the offer of the insurer as made. The contract can be modified by
endorsing the contract using pre-approved language. It also must be noted that the language in insurance
contracts are generally approved by state law. And for life insurance, if the language does not meet
insurance code minimums, the minimum is automatically read into the contract. Importantly, the rule of
law regarding "contracts of adhesion" is that any ambiguities are resolved against the WRITER of the
contract. The writer of the contract most of the time is the insurance company. However, large companies
can write their own "manuscript" policies and place them in a broker's hands for bids. In this case
ambiguities are construced against the writer - the insured in this case.
Contract of Indemnity
Property and liability insurance policies are said to be "contracts of indemnity" because the purpose of
insurance is to indemnify the insured—that is, to make good a loss that the insured has suffered. The
principle of indemnification is that the insured should not profit from the policy. This does not preclude
that the insured will suffer some loss. In fact, many policies include a deductible which guarantees that
the insured will pay part of each loss himself.

Insurable Interest
Insurable interest is one wherein economic loss would be suffered from an adverse occurrence to the
person(s) insured.

A person can only collect in property casualty if the insured has insurable interest at the time of the loss.
Many times a person can buy a valid contract but there is no insurable interest yet. An example is before
buying a house you have to show up with a contract or a binder proving that the house is insured to
receive the mortgage - thus, one may insure property where there is not insurable interest in anticipation
of such. One can only collect at the time of loss if insurable interest then exists.

In life insurance, one only needs insurable interest at the time the policy is taken - no continuing insurable
interest is required. Controversial areas include corporate-owned life insurance, investor-owned life
insurance and viatical settlements.