Required Elements of an Insurance Contract


The insurance industry abides by certain federal and state laws that dictate how insurance companies operate. Insurance policies fall within the area of contract law, which requires certain elements be present within a contract agreement. These elements describe the terms and conditions of the contract and the agreed-upon obligations of the parties involved.

Contract Law

State and federal laws deal with different aspects of daily life that affect people, businesses and events. Criminal law deals with crimes committed between people or businesses. Tort law addresses liability issues caused by negligence or misconduct. Contract law deals specifically with legal agreements formed by consenting parties. These laws pertain to insurance contracts and more specifically the insurance policies that companies draw up on behalf of the people and businesses they insure. Contract law lays out the mandatory requirements, or elements needed in order for an insurance policy to act as a binding contract.

Contract Terms

The basic terms of a contract involve the agreed-upon transaction or offer and the value each participant contributes to the agreement. The offer defines the purpose of the contract in terms of why the parties involved are entering into the agreement. The value each party brings to the agreement involves the services or protections the insurance company will provide under certain conditions and the policyholder’s agreement to pay for said services. The information contained in a policyholder’s application for insurance also represents value since the insurance company bases its contract on the information contained in the initial application.

Contracting Parties

The parties involved in an insurance contract typically include the insurance company and the applicant or person being insured. The applicant can also name another person or entity as the insured party, though the contract is still between the applicant and the insurance company. Both parties must also be legally able to enter into a contract agreement. For applicants, legally able refers to age, or adult age and mental capacity. For insurance companies, legally able refers to a company’s possessing the required licensing and authorization to sell insurance and enter into contracts with policyholders. State governments issue licensing credentials for insurance companies and grant companies the authority to prepare insurance contracts.

Contract Conditions

By law, insurance contracts must spell out the conditions of the agreement, which entail certain responsibilities and actions to be carried out by the insurance company and the insured. Contracts must include an “insuring clause” that lists the particular losses covered by the contract in the event of a claim. The contract’s conditions describe the policyholder’s rights in terms of being able to cancel a policy or the right to reinstate a policy once the contract terms expire. Contract conditions also address details regarding how claims will be paid to the policyholder. Insurance companies may also include exclusion provisions that describe what a policy does not cover in terms of losses or circumstances that don’t fall within a policy’s coverage guidelines.

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