Contract law and the essentials of a valid contract
Contract law and the essentials of a valid contract tests whether an insurance policy is enforceable and what each party has promised. You must separate an offer from an invitation to treat and show how consideration and intention operate in insurance.
Essentials of a valid contract
- Offer: a definite promise on stated terms. A proposal form is usually an invitation to treat; a completed proposal may be an offer, depending on wording.
- Acceptance: unqualified agreement, communicated to the offeror. Instantaneous communication takes effect on receipt; the postal rule applies only where post is contemplated.
- Consideration: something of value given in exchange. In insurance the premium is the insured's consideration; the insurer's promise to pay claims is the consideration for the premium.
- Intention to create legal relations: presumed in commercial insurance, rebuttable in domestic arrangements.
- Capacity and legality: minors, persons lacking mental capacity and illegal risks can affect enforceability.
Terms and interpretation
- Express terms are stated; implied terms may come from statute, custom or business efficacy.
- Conditions, warranties and innominate terms have different remedies; in insurance, 'warranty' has a special meaning addressed in the next domain.
- Contra proferentem may assist interpretation against the drafter, but clear wording prevails.
Worked example
A broker sends a completed proposal to an insurer marked 'subject to satisfactory survey'. The insurer replies 'cover bound from noon today'. The survey later reveals defects. The insurer's reply is an unqualified acceptance of the risk described, not of the survey outcome; the 'subject to' wording was in the broker's offer, and the insurer accepted the risk as presented. If the insurer had said 'cover subject to survey', there would be no binding cover until the survey was satisfactory.
Traps that cost marks
- Treating every proposal form as a binding offer.
- Saying insurance needs no consideration because the premium is not mentioned in the policy.
- Applying the postal rule to telephone or email acceptance.
- Ignoring capacity and illegality because the policy looks standard.