Insurance Contract Law and Policy Provisions
Insurance Contract Law and Policy Provisions tests the formation and enforcement of the insurance contract: offer, acceptance, consideration, capacity, legality, good faith, warranties, conditions, and the standard policy provisions that decide disputes.
Core rules
- Formation requires offer and acceptance, consideration (premium), capacity and lawful purpose; the policy is the evidence, not the whole contract.
- Utmost good faith applies to both parties; material facts must be disclosed, and the insurer must not misrepresent cover.
- Representation is a statement believed true; warranty is a promise that must be exactly met, though modern law may require materiality.
- Conditions include premium payment, notice, proof of loss and cooperation; a condition precedent must be met before liability attaches.
- Incontestability limits the insurer's right to rescind for nondisclosure after a stated period, usually two or three years, except fraud.
- Grace period, reinstatement, free look, cancellation, assignment and nomination govern the policy after issue.
Worked example
An applicant denies smoking but dies of lung cancer in year one. The insurer proves the smoking history and materiality: had it known, it would have charged 50% more or declined. Within the contestability period, the insurer may rescind the policy and refund premiums, rather than pay the death benefit. If the same facts emerged after the contestability period, the insurer's remedy is usually limited unless fraud or a specific exclusion applies. Reasoning: good faith is tested at proposal; time limits change the remedy, not the original duty.
Traps
- Treating every inaccurate answer as grounds for rescission; materiality matters.
- Confusing a warranty with a representation.
- Ignoring the difference between condition precedent and condition subsequent.
- Assuming the free-look period applies after the policy has been in force for months.
- Forgetting that assignment and nomination have different legal effects.