Page 62 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Unit 4: Contract of Insurance

4.3.1 Offer and Acceptance Notes

Just remember, the person who wants to take cover against particular perils offers his risk
through a proposal form to the insurance company. Insurance company may or may not accept
the risk. Thus, offer for entering into contract may generally come from the insured. The insurer
may also propose to make the contract but whether the offer comes from insurer or insured, the
main fact is acceptance.

Did u know? Any act that precedes an acceptance is an offer or a counter-offer. All that
precedes the offer or counter-offer is an invitation to offer. In insurance, the publication of
prospectus, the canvassing of agents are invitations to offer to the public.
When the prospect (the potential policy-holder) proposes to enter the contract of insurance, it is
an offer and if there is any alteration in the offer (suggested by either party) that would be a
counter-offer.
If this alteration or change (counter-offer) is accepted by the proposer; it would be an acceptance.
Immediately the notice of acceptance is given to other party and it would become a valid
acceptance.

4.3.2 Legal Consideration

You must remember that the promisor (insurer) promises to pay a fixed sum at a given
contingency. So the insurer must have some return/consideration for his promise. The premium
paid is the consideration and on receipt of the premium by the insurance company, the contract
comes into force.
Hence, premium being the valuable consideration must be given for starting the insurance
contract. The fact is that without payment of premium, the insurance contract will not come into
force.

4.3.3 Parties Competent to Contract

You will find it interesting to note that both the parties must be legally competent to enter into
an agreement. An agreement with a mentally unsound person does not form a valid contract. So
also an agreement with a minor, insolvent and foreigner is not a valid contract.
Every person is competent to contract:

Who has attained the age of majority according to the law
Who is of a sound mind

Who is not disqualified from contracting by any law to which he is subject to
A minor is not competent to contract. A contract by a minor is void excepting contracts for
necessaries. A person is said to be of sound mind for the purpose of making a contract if at the
time when he makes it, he is capable of understanding it and of forming a rational judgment as
to its effect upon his interest. An alien enemy, an insolvent and criminals cannot enter into
contract. Thus contract made by incompetent party/parties will be void.
4.3.4 Free Consent

You should remember that there should be a complete and unbiased agreement between the
insurer and insured regarding the terms of contract. The intention of the insured and insurer

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