Policy Provisions and Contract Law
Contract basics
An insurance policy is a contract requiring offer, acceptance, consideration, legal purpose, and competent parties. The application is usually the offer; policy issuance or binder acceptance; the premium is consideration. A binder is a temporary contract providing coverage before the policy is issued. Policies are contracts of adhesion (insurer drafts terms), aleatory (unequal exchange), unilateral (only the insurer makes an enforceable promise), and conditional (payment depends on conditions). Insurance also requires utmost good faith.
Representations, warranties, conditions
A representation is a statement believed true to the best of the applicant's knowledge; a warranty is a promise that must be literally true. A material misrepresentation can void coverage. Conditions are duties such as notice of loss, proof of loss, and cooperation. Endorsements amend the policy and prevail over conflicting printed text. Subrogation lets the insurer pursue a negligent third party after paying a loss; the insured cannot impair that right. Appraisal resolves amount-of-loss disputes. Cancellation and nonrenewal provisions control notice.
Traps
- Treating a binder as merely a receipt; it is temporary coverage.
- Confusing a representation with a warranty.
- Assuming any misstatement voids coverage; it generally must be material.
- Forgetting that endorsements override the base policy.
Worked example
An applicant says the building has a working sprinkler system, but it is disconnected. That is a representation about a material fact. If a fire loss occurs and the insurer relied on the statement, coverage may be rescinded or denied. If the policy instead contained a warranty that the system is maintained, the insured's breach could also defeat coverage.
Rule of thumb: application = offer; binder = temporary acceptance; premium = consideration.