Banking and Insurance · Ch 3 — Introduction to Insurance
The Insurance Contract; Contingent Contract versus Wagering Agreement
The Insurance Contract; Contingent Contract versus Wagering Agreement
4. The Insurance Contract; Contingent Contract versus Wagering Agreement
Insurance as a contract. An insurance policy is, first of all, a valid contract, and so it must satisfy all the essentials of a valid contract laid down in the Indian Contract Act, 1872:
- Offer and acceptance — the proposer makes an offer (the proposal form) which the insurer accepts (by issuing the policy);
- Lawful consideration — the premium paid by the insured, in return for the insurer's promise to pay on the contingency;
- Capacity of parties — both parties must be competent to contract (of age, sound mind, not disqualified by law);
- Free consent — consent must not be caused by coercion, undue influence, fraud or misrepresentation;
- Lawful object — the purpose of the contract must be lawful.
Beyond these general essentials, an insurance contract also has special features that ordinary contracts do not require — above all utmost good faith and insurable interest (both examined in the next section) — which is why insurance is often called a special class of commercial contract.
Insurance is a contingent contract. Under Section 31 of the Indian Contract Act, 1872, a contingent contract is "a contract to do or not to do something if some event, collateral to such contract, does or does not happen." An insurance contract fits this exactly: the insurer's promise to pay depends entirely on the happening (or non-happening) of an uncertain future event — a fire, an accident, a death, or survival to a stated date. Until that event occurs, no money is payable; the obligation is contingent upon it. So every contract of insurance is a species of contingent contract.
Contingent contract versus wagering agreement. Because both an insurance contract and a bet depend on an uncertain event, students sometimes wrongly treat insurance as a form of gambling. The two are fundamentally different, and the difference is one of the most important ideas in this chapter.
| Basis | Contingent contract (e.g. insurance) | Wagering agreement (a bet) |
|---|---|---|
| Legal validity | Valid and enforceable in a court of law (Sec 31) | Void; agreements by way of wager are unenforceable (Sec 30, Indian Contract Act) |
| Interest of parties | A party has a real, existing interest in the subject matter apart from the contract (the insured actually owns the property / life at risk) | Parties have no interest in the event other than the stake they will win or lose |
| Nature of the event | The uncertain event is collateral to the contract and would exist anyway; it is not created by the contract | The uncertain event is the sole basis of the agreement, created only for the bet |
| Element of loss | One party suffers a genuine loss if the event happens; insurance merely compensates that loss | Neither party suffers a real loss; one simply wins what the other loses |
| Purpose | To provide security against a genuine risk | To make a gain purely by chance |
Under Section 31 of the Indian Contract Act, 1872, a contract to do or not do something if some event collateral to the contract does or does not happen; ever …
An agreement in which parties, having no genuine interest other than the stake, promise to pay on an uncertain event; void and unenforceable under Section 30 of t …
Offer and acceptance, lawful consideration, capacity, free consent and lawful object — all of which an insurance contract must satisfy under the …