The Difference between the Ordinary Contract and the Insurance Contract - Essay Example

Draft An insurance contract can be defined as a contract between an insurer and the insured where the insured pays consideration in form of premiumsand the insurer is required to pay insurance benefits to the insured when the event that he is insured against occurs. Using this definition of insurance and that of a normal contract, which can be defined as a legal agreement between two or more parties for purchase or provision of goods or services using the principle of offer and acceptance, some difference can be seen. While in insurance contract the insured pays premiums to the insurer in order for him to be paid the benefits when the event that he was insured against happens. This means that the insured will be continuously paying premiums to the insurer until the event for which he is insured against happens, otherwise, if he fails to pay he is deemed to have breached the insurance contract and the insurer is not responsible in case the event which was insured against happens. In insurance contract, the occurrence of the event for which the insured pays premiums for is not definite and may fail to occur within the period that the insurance agreements last. Upon such situations, the insured forfeits the insured amount and if he wishes to renew the agreement, he has to pay another sum as may be agreed by the insurer upon determination of the cost of insurance. On the other hand, in the normal contract law, the goods or services for which consideration is paid must be delivered to the purchaser failure to which the contract is deemed to be null and avoid and the seller will have to forfeit the amount he has been paid for the good or service. Nonetheless, if he delivers the good, the purchaser is bound to pay the agreed amount in full. A major difference between the ordinary contract and the insurance contract is the principle of utmost good faith in insurance contract. This doctrine requires the parties entering into an insurance contract to disclose all information that is material to the contract. For instance, when applying for life assurance, the party seeking life assurance should reveal all personal information that is important to the contract such as previous medical problems they may have had, the current medical conditions that they suffer from among other important information. On the other hand, the insuring party should also disclose and explain clearly the crucial information regarding the contract including the terms and conditions. Any information which if disclosed later would make one of the parties review their decision of having an insurance contract with the other party is considered crucial in insurance and should be disclosed before the contract is signed. Conversely, the normal contract law does not require the parties involved to disclose all the information, therefore, one party is allowed to have more information than the other regarding the material issues of the contract as long as they do not compromise the contents of the contract. For instance, no party is bound to explain or the details of the contract such as the terms and conditions. The objective of the insurance contract is to maintain the interests of the insured party to the level where they were before the event that he is insured against happens. this means that the insured does not get any additional benefits, for instance, in the case of life assurance, when the bread winner dies, the purpose of the insurance will be to ensure that the insured or the dependants continue living the same lifestyle that they were living prior to the death of the breadwinner. On the other side, the normal contracts are entered to when the parties want to gain something that they do not have or to improve on their current status. This is to mean that in a normal contract, both of the parties must benefit from the transactions. In insurance contract, there must be an insurable risk involved otherwise the contract cannot take place. Insurable risk in the law of contracts means risks that meets the requirements of insurance policy which are that the insurer should be able to charge high premiums that they are able to cover the claims but also the administration expenses on the side of the insurer. At the same time not large to the extent that the insurer would not be able to pay the loss. Secondly, the risk must be definite and measurable financially meaning that both the insurer and the insured should be able to agree on when the risk has happened and the damage that it has caused. In addition, an insurable risk should be random in that the insured should not be able to anticipate the chances of the risk happening. In ordinary contracts there is no necessity for insurable risks since there are no risks involved, the conditions that are required in general contracts is that there should be a good or service being offered and consideration for that good or service. For a general contract to legally binding, there must be a consideration which does not necessarily equal to the value of the good or service being provided; the law requires that the consideration should be reasonable and not include a duty that one of the parties have towards the other or another party. For instance, in general contract law, the consideration for the purchase of a car worth $ 10, 000 could be as little as $ 500 as long as the offer to buy the vehicle at that price. However, if the seller agrees to give the buyer that car in exchange of the buyer giving testimony in a court of law, then that contract is null and void since the consideration for the car is an obligation on the side of the buyer. For insurance contract, the worth of the insurance contract has to be equal to the loss that the insured is likely to face in case that event happens. for instance, insuring a car worth $ 10,000againist theft will require the insured to pay premiums worth at least that amount for the contract to be legally binding. In general contracts the agreements involve the payment of performance of a service that the payee does not have or purchase of a good that does not belong to him or her, therefore, the consideration that is paid involves exchange of ownership. Any contract that involves payment for a good that already belongs to the payee is null and void. On the other hand, in insurance contracts, the payment of premiums does not involve exchange of ownership of the assets involved since the insured property already belongs to the insured. However exceptions in this case involve assets that have been completely damaged and have to be replaced with a new one in which case the insurer has takes ownership of the damaged asset. For instance, in a case where an insured motor vehicle gets an accident and it cannot be repaired, the insurer has to replace the vehicle with a new one and takes possession of the wreckage. In claim insurance, the insurance contract law requires the insured to claim the benefits within a period of three years after the insured event happens, failure to which the insured is deemed to have forfeited that right. On the other hand, in the normal contract law, there is no specific period set by law under which the contract must be enforced; the parties involved usually set the period of enforcing the contract. Double insurance, which means insuring the same subject matter more than once with different companies is allowed in insurance law up to the extent that the insured is not compensated more than the value of the subject insured. For instance, if a person has insured a car worth $ 10, 000 against theft with two insurance companies, the claims he will get from both companies upon that risk happening will not exceed $ 10, 000. On the other hand, in general contracts an individual cannot be paid twice for provision of a good or services in whichever circumstances and doing so would be considered as fraud which would lead to termination of the contract. According to the insurance contract law, a party willing to enter into an insurance contract with an insurer is required to disclose any information at his disposal that they think will be relevant to the insurer in making the decision on whether or not to accept the risk, or the information that any reasonable person would be expected to know is important to insurers. The information that a reasonable person is expected to know is important to insurers is the nature and of the cover and kind of persons who are likely to apply for the insurance cover. to clarify on what the party seeking to be insured knows is relevant to the insurer, the insurer has to indicate the information that he deems relevant for the contract to be valid, for instance, information about the clients past behaviour and experience with the subject matter being insured. Under the common law, both the insurer and the party being insured have an obligation to act towards each other in utmost good faith , and no party should be held in high regard over the other. From this information on what the law says about disclosure, Miranda should reveal to the insurer that she had an accident as a minor while driving one of her friend’s car. This information will be useful to the insurer to determine whether he will enter into the contract willingly and the amount of premiums that he will charge Miranda. The remedies that accrue to an insurer who finds out that the client did not give full information as required by law include the reduction in the amount of claims that the insured can recover. Read More