An Insurance Contract- A Sui Generis Contract?
At its core, insurance is a contract. For all lawyers and even non-lawyers, that is simple enough. A contract is an agreement between two or more parties that is meant to be and is legally enforceable (in courts or via out-of-court settlements). Also, since insurance is rooted in contract, all pertinent contract rules emerge with respect to it: offer and acceptance, consideration, terms and performance, and breach.
In terms of offer and acceptance, the offer is usually made by the prospective insured (the person wanting to be insured by the insurance company) in the form of a completed proposal form. A regular proposal form of health insurance, for example, would include questions pertinent to the risk sought to be insured (i.e. risk of contracting illness, disease, or death), including:
- Name of the Applicant (the insured),
- Age of the Applicant,
- Weight of the Applicant,
- Knowledge of any known conditions or diseases (e.g. high blood pressure, diabetes, alcoholism),
- Whether the Applicant is currently taking any medication and for what,
- Type of Job Profile of the Applicant, and so forth.
Upon completion of the said form (the offer), it is typical for the insurance companies to accept it, after providing the terms of the policy, including the premium to be charged. The payment of the premium is usually seen as a condition precedent to the contract i.e. without the premium being paid, the insurers would still be at risk. However, a promise to pay a premium may be satisfactory for the court’s purposes. Where the insurer is issuing cover notes or where the contract is to be renewed, the insurer becomes the offeror and the insured, the acceptor.
Of course, the consideration for the contract comes from the insured paying the premium, in exchange for the insurer promising to pay the insured, either a duly stipulated amount upon the happening of an event, or an indemnity (a valuation of the exact loss suffered). There is always that argument that in the situation that the insured event does not come to materialise, the insurer has provided inadequate consideration, yet the promise and the peace of mind may be an invaluable consideration to the insured.
In fact, to some, insurance is not simply invaluable. Some might go so far as to view it as charity: “charitable” insurers provide somewhat gratuitously a sum of money to the “needy” insured. Legally speaking, the premium, even when a lesser amount than the potential liability, is taken as consideration for the contract as per normal contract law principles, consideration need not be adequate, if sufficient. But insurance is the charity to mainly moderately-incomed people.
The homeless or the destitute may beg on the roads for charity and fulfil their requirements with the proceeds. Less poor people, for example, of the domestic staff strata or otherwise, can usually avail interest-free loans and charity from their employers when in times of need. But any class above that (a) has greater monetary risks involved with their property, and (b) would rarely be able to feed on the acts of charity of someone in a higher economic position than themselves. It is not being said that this person doesn’t have money for his or her day-to-day life, but odd expenses (such as money to arrange a funeral) that may require larger liquid ejections of lump-sum money, might be above his or her pay-scale.
The insurance contract seeks to counter this. It provides for such people in their time of need by taking a smaller amount over a longer course of time, an amount that was not difficult to pay for the insured, and then, taking up the rights and obligations of the insured when the risk materialises.
This is not to say that insurance is not for everyone. The rich class take out insurance and those people who cannot afford or do not have insurance may also feel the positive ripples of insurance in their lives. This ties in well with the idea projected in my last article, that insurance is the carbohydrate of social welfare.
As can be seen, the insurance contract may be seen as even a charitable and noble instrument, but the uniqueness of this contract does not end here. One very distinctive element of an insurance contract comes from the Latin phrase, “uberrimae fidei”: a contract of utmost good faith.
Good faith is a concept that is easily understood and recognised. For lawyers and non-lawyers, good faith is the key to any legal (and otherwise) relationship. But when a vendor wishes to sell a fake Samsung S8 phone for Rs. 70,000 and the buyer wants to buy it, there is no problem with that. In the scenario that the seller is expressly asked if the phone is an original and he replies, “Yes”, will there be a cause of action for misrepresentation and fraud. However, barring that, even sales puff to hit home the quality of the phone would probably be no obstruction to a valid contract between the two because the buyer is under no obligation or positive duty to expose that the phone is not original.
Historically, that is not the case with insurance contracts. Good faith, as in the example, is simply not enough as utmost good faith is required. The concept emerges from the English maritime law and was famously codified by Lord Mansfield in Carter v Boehm (1766) 3 Burr 1905. It is said that Lord Mansfield’s attempt was to introduce a general duty of utmost good faith for all contracts, but fortunately, this didn’t come to fruition and limited itself to the insurance contract.
According to Black’s Law Dictionary, the following can be said on contracts of uberrimae fidei:
“[I]n a certain restricted group of contracts, good faith is peculiarly necessary owing to the relationship between the parties, and in these cases – known as contracts uberrimae fidei – there is a full duty to disclose material facts. The typical instance of such contracts is the contract of insurance. Here the duty to disclose all material facts to the insurer arises from the fact that many of the relevant circumstances are within the exclusive knowledge of one party, and it would be impossible for the insurer to obtain the facts necessary for him to make a proper calculation of the risk he is asked to assume without this knowledge.”
The rule also has been incorporated into American maritime insurance law by the Supreme Court, where they explained that the
“[T]he contract of insurance, is one of mutual good faith; and the principles which govern it, are those of an enlightened moral policy. The underwriter must be presumed to act upon the belief, that the party procuring insurance, is not, at the time, in possession of any fact material to the risk, which he does not disclose.” - McLanahan v. Universal Ins. Co., 26 U.S. 170, 176, 7 L. Ed. 98 (1828)
In Pakistan as well, section 75 of Insurance Ordinance 2000, upholds the idea of the utmost good faith and implies into an insurance contract this duty to act in the best interest of either party.
The views expressed in this article are those of the author and do not necessarily represent the views of CourtingTheLaw.com or any other organization with which she might be associated.