life and Health Insurance - FIN-3660
Abu khaled
ch3.pptxThe Insurance Contract
Life and Health Insurance FIN 3660
Chapter 3
Contracts
The fundamental basis of modern commerce is the contract, which is a legally enforceable agreement between two or more parties.
Valid contract: contract that is enforceable at law because it satisfies all legal requirements.
Void contract: a contract that does not meet one or more of the legal requirements to create a valid contract and, thus, is never enforceable.
Voidable contract: a contract under which one party has the right to avoid his obligations under the contract. The other party, however, is bound by the terms of the contract.
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Contracts
Requirements to form a valid contract vary depending on whether the contract is a formal contract or an informal contract.
Formal contract- sometimes referred to as a contract under seal, is a contract that is enforceable because the parties met certain formalities concerning the form of the agreement.
Informal contract- is a contract that is enforceable because the parties to the contract met requirements concerning the substance of the agreement rather than requirements concerning the form of the agreement.
A valid informal contract may be an oral agreement or a written document.
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Requirements (cont.)
Mutual Assent – a meeting of the minds about the terms of the agreement.
Offer is a proposal to enter into a binding contract with another party. Offeror makes an offer to the offeree.
Acceptance is the offeree’s unqualified agreement to be bound in terms of the offer.
Legally Adequate Consideration – each party must give or promise something that is of value to the other party
Initial premium is the first premium paid for an insurance policy
Renewal premium is a premium payable after the initial premium, is a condition for continuance of the policy and is not consideration for the policy
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Requirements for an Informal Contract continued
Lawful Purpose – no contract can be made for a purpose that is illegal or against the public interest, a contract is valid if it is made for a lawful purpose.
Contractual Capacity – the legal capacity to make a contract
Of individuals: every individual is presumed to have the legal capacity to enter into a valid contract
A minor is a person who has not attained the age of majority.
Of corporations: corporations are generally presumed to have the contractual capacity of a mentally competent adult.
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Types of Contracts
Bilateral and Unilateral Contracts – a contract between two parties may be either bilateral or unilateral.
Bilateral contract: both parties make legally enforceable promises when they enter into the contract.
Unilateral contract: only one of the parties makes a legally enforceable promise when entering into the contract.
Example: life insurance
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Types of Contracts
Commutative and Aleatory Contracts – the parties to many contracts specify in advance exactly what they promise to do.
Commutative: an agreement under which the parties specify in advance the values that they will exchange.
Aleatory: a contract under which one party provides something of value to another party in exchange for a conditional promise.
Conditional promise is a promise to perform a stated act if a specified, uncertain event occurs. If the event does not occur, the promise will not be performed.
Under the aleatory contract, one party may receive something of greater value than that party gave. Ex: life insurance
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Types of Contracts
Bargaining Contracts and Contracts of Adhesion – many contracts are a result of negotiation between the parties to the contract
Bargaining contract: one in which both parties, as equals, set the terms and conditions of the contract.
Contracts of Adhesion: a contract that one party prepares and that the other party must accept or reject as a whole, generally without any bargaining between the parties to the agreement.
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