Published on January 30th, 2021 | by Bibhuranjan0
Legal Aspects and Principles of Motor Insurance
Two elements will be discussed: the first one is the requirements of a valid contract and then the principles of Insurance both are important for the operation of an Insurance policy. An insurance policy is treated as a contract in any insurance transaction. The insurance policy is a contract between the insurance company and the insured or also known as the policyholder.
The motor insurance contract is no different from other insurance contracts. The policy is subject to the law of contracts. The contract is between the insurance company and the insured. However, being a complex contract, it is better to have it in writing. Hence the policy is treated as evidence of the contract. The policy along with all its attachments and endorsements (amendments) is treated as a complete contract. A contract to be enforceable legally should be a valid contract.
Requirements of a valid contract
A contract can be a verbal contract or it can be a written contract. Insurance policy in legal terms is a contract and is subject to the legal requirements of a country. Insurance is a complex area, to avoid the chances of fraud and misunderstanding a policy should be in writing. A written contract protects all the parties involved in the contract.
The proposer is the person who is interested in purchasing first month free car insurance from the insurance company and he proposes to the insurance company. The proposer is also known as the first party and the insurance company is known as the second party. Other than the insured and the insurer, the rest is treated as the third parties.
When the proposer proposes to the insurer and the insurance company accepts, upon acceptance with the necessary consideration and fulfilling the other requirements of a contract, it becomes a contract.
Let us try to understand some basics of a contract. A contract is an agreement between two or more parties, which creates a legally binding relationship between them. Legally, an insurance agreement is treated as any other contract.
Minimum essentials for a valid contract
There are certain minimum essential ingredients for a contract to be a valid contract, which are as follows:
Pyramid depicting the essentials ingredients of a Contract
1. Offer and acceptance
The offer can be oral (verbal) or it can be in writing in the form of a proposal form. Insurance contracts being of a highly technical nature it is better to have a proposal form and the policy. This will make the contract a written contract and which is better than the verbal contract.
The insured will submit the proposal to the insurance company with an intention to buy motor insurance. The Insurer will study the proposal and then if found suitable may accept or reject and, in some cases, will accept after certain modifications. The proposal form can go back and forth and each time it becomes an offer and counteroffer.
There may be few counters offers or none before reaching an agreement. Once the proposal form is accepted by the insurers then it becomes an agreement. The rules of a legal contract have to be followed in order for the contract to be valid. Like the offer and acceptance should be for legitimate purposes and should be done as per the law, no coercion or fraud should be involved.
In order for a contract to be valid, there has to be a consideration. If consideration is not there then the contract will not be a valid contract. Consideration is the value offered by one party to another party. In insurance contracts, the insured pays or agrees to pay the insurance premium and the insurance company promises to pay the admissible claim in case of a loss suffered by the insured. These considerations (money or services) will bind the contract.
3. Legal capacity to contract
One of the essential parts of a contract is the legal capacity of the contract. For a contract to be a valid contract all parties to the contract should have the legal capacity to enter into a contract. The insurance company should be duly registered in the country of operation and should have the license to sell the particular class of insurance and should be capable of entering into an agreement.
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With respect to a juristic person, they also should be legally capable of entering into an agreement with the Insurance companies. In respect of individuals, the following are not capable of entering into a legal agreement
- A person under the legal age
- An Insane person (person who is mentally incompetent)
- Being under the influence of intoxicants
The parties to the agreement should have the same thinking or mind. The parties to the contract of motor insurance are the insurance company and the insured. They should know the exact reason for taking the insurance policy and should be in consensus with the agreement.
If the insured wants to Get Now and Pay Later Auto Insurance but the insurer doesn’t provide this type of plan, or if the insured needs comprehensive insurance coverage and the insurance company offers him the third-party liability only coverage then there is no consensus or common intention of entering into an agreement. Such an agreement will not be valid as there is no consensus between them.
2. Legal objective
The contract entered must be for a legal purpose. The insurance business is subject to regulations and most of the regulators also do the job of policing and controlling the insurance companies. However, if the Insurer is not authorized to write motor insurance business and does not have a license to write motor insurance then if they are writing motor insurance policy then it becomes illegal. Focus on recognized insurance companies like Cash Register Insurance and avoid illegalities. Similarly, if the insured is insuring a vehicle, which is stolen then the legality is violated. The legal purpose is defeated in such situations and the contract will become invalid.
Cover Image by Steve Buissinne from Pixabay