Insurance contracts require unique solutions

Insurance contracts not only need these elements but also include several distinctive aspects that deserve a closer look.

Uncertain conditions

Insurance contracts are conditional contracts, because they depend on uncertain events or conditions. Most of the time, contracts involve an agreement of something that must be fulfilled, such as work being completed. However, in property and liability insurance, the incident insured against might never happen, so performance under the contract might never be required.

Insurance contracts also are considered contracts of adhesion because the insured must adhere to the agreement as it is written. The contract can contain options such as different deductible amounts or varying levels of coverage, but for the most part, the contract is predetermined. Other types of contracts involve negotiation between offers and counteroffers until a final agreement is reached. But with insurance contracts the insured has no ability to change definitions, of the policy, such as, for instance, who is insured.

Another aspect of insurance contracts is the fact that they are contracts of utmost good faith. This means both the insurer and the insured disclose all relevant facts between both parties because the contract involves a promise, not a product. Facts that are material to the contract need to be disclosed.

Indemnification

Finally, insurance contracts are contracts of indemnity because they are meant to restore the insured to the same financial condition they were in before the loss occurred.

The meaning of indemnification is to make the insured whole again, with neither a profit nor a loss. An insured party that has suffered a loss and receives a greater amount than they lost is not considered indemnified. The same is true of an insured party that receives an amount less than the loss. This concept is the very core of insurance.

For an insured party to be indemnified they must have an insurable interest in what they are insuring.

An insurable interest means the insured has a right, relationship or interest in the subject being covered by the insurance contract and will be hurt financially if a loss occurs.

In property and casualty insurance, without an insurable interest there is no financial loss, so there cannot be any indemnification.

For example, let’s say someone wants to insure their neighbor’s house, a house in which they have no ownership. This person would have no chance of suffering any financial harm in the event of a loss, because only the owner of the house would be affected.

Therefore, buying insurance on the neighbor’s house would be like betting, because the goal would be to make a profit, and making a profit is not contemplated by being indemnified. Only the real owner of the house has the insurable interest and can buy insurance on the property.

Insurance contracts are unique in many aspects from other types of contracts. These differences should be kept in mind when purchasing insurance.

David Endacott is a business insurance specialist with Nixon & Lindstrom Insurance. He may be reached at dendacott@nixonins.com.