A contract of insurance is a contract of utmost good faith technically known as uberrimae fide. The doctrine of disclosing all material facts is embodied in this important principles, which applies to all forms of insurance. The Proposer, who is one of the parties to the contract, is presumed to have means of knowledge, which are not accessible to the insurer, who is the other party to the contract. Therefore, the proposer is bound to tell the insurer, everything affecting the judgement of the insurer. In all contract of insurance, the proposer is bound to make full disclosure of all material facts and not merely those which he thinks material. Misrepresentation, non-disclosure or fraud in any document leading to acceptance of the risk automatically discharges the insurer from all liabilities under the contract.
Application of General Rules of Law of Contracts to Life Insurance
A contract of life insurance is in many respects governed by the general law of contracts. There are also some peculiar aspects relating to life insurance contracts. As a general rule the terms of contracts are ascertained from the document embodying the contract. In Life Insurance, the policy is the document which expresses the contract between the insurer and the insured. The contract comes into existence when the proposal from a party is accepted by the insurer and the terms of the acceptance are complied with by the party. The contract will have to be interpreted according to the policy document, though in certain circumstances, the life assured may rely on the prospectus published by the insurer.
- Offer and Acceptance: A contract of Life Insurance, like any other contract, begins with the proposal (offer). If the insurer, after considering the proposal and other related information, is willing to issue a policy, he sends a letter termed “letter of acceptance”. In the letter it is stated that he will grant a policy provided remittance of the premium is received within a specified period and the state of health of the prosper remains unchanged till the date of remittance of premium or date of the letter of acceptance whichever is later. The letter of acceptance is a counter offer and the proposer accepts the counter offer by paying the premium within the stipulated time. Offer and acceptance constitute an agreement and an agreement enforceable by law is a contract. The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made.
- Consideration: Consideration is something which moves from one party to the other in return for what the other party give. In Life Insurance contract, the payment of the premium is consideration for the contract on the part of the life assured and the undertaking of the insurer to pay a sum of money when the claim arises is consideration on the part of the insurer.
- Capacity to Contract: The parties to an assurance contract must be capable of entering into contracts. Every person is competent to contract who is of the age of majority, who is of sound mind and is not disqualified from contracting by any law to which he is subject.
- Consent of the Parties to the Contract: Two or more persons are said to consent when they agree upon the same thing in the same sense. Similarly, the parties to contract of Insurance, must agree the terms of agreement in the same sense.
- Legality of Consideration and Object: Every agreement wherein the consideration or object is unlawful is void. Therefore, for a valid contract there should be proper consideration and legally valid object.