What is an Insurance Contract or Policy?
Insurance Policies Explained
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What is an insurance contract?
An insurance contract, or insurance policy, establishes the legal relationship between the insurer and the insured. A potential insured makes an offer to the insurer to purchase the insurers services. In the application, the insurer will reveal all information relevant to the insurance relationship. The insurance relationship begins when the insurer accepts the insureds offer to purchase coverage, which is the effective date of the insurance policy. The insurance contract lays out the extent to which the parties allocate or transfer the contingent risk of loss to the insurer. It will detail the rights and obligations of the parties, as well as the types of situation giving rise to loss and the limits of the insurers responsibility to pay for losses incurred.
Note: Failure to disclose all material information may later lead to the contract being rescinded by the insurer.
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Discussion: Why do you think the disclosure of factual circumstances is important in the formation of an insurance contract? Why do you think the effective date is an important concept for insurance contracts?
Practice Question: ABC Corp identifies a risk of customer injury on its premises. ABC approaches 123 Insurance, Inc., about purchasing a policy to cover this risk. What is the process for establishing an insurance contract?