Insurance Policy is a Contract:
A life insurance policy promises that the insurer will pay to the policyholder a certain sum of money if the person dies or any other specified contingency happens. A non life insurance policy promises to pay when there is claim due to some natural calamity like fire, flood, earthquake, etc or some other unforeseen situation. It is a contract under the Indian Contract Act 1872. A contract is an agreement between 2 or more parties to do, or not to do, so as to create a legally binding relationship.
A simple contract must abide by the 7 clauses of the Indian Contract Act 1872,
1. Offer and Acceptance- the policyholder offers to the insurer to cover his risk for life and it depends on the insurer whether it wishes to ‘accept’ or ‘decline’ the offer. Only if the insurer accepts the risk, the policy commences
2. Consideration- Premium is the consideration that needs to be paid by the policyholder to the Insurance Company for undertaking his risk.
3. Capacity to Contract: The insurer must have the ‘capacity’ to take the risk.
4. Consensus ‘ad idem’- Both parties should come to a common agreement to the terms and conditions of the contract.
5. Legality of Object or Purpose- Since this is a legal contact, the object or purpose for insurance must be a legal one.
6. Capability of performance- The policyholder must have the capability to pay the premium according to the agreed terms and conditions and the Insurer must have the capability to pay the claim when it arises.
7. Intention to create a legal relationship- between the insurer and the policyholder.
Insurance is a contract between the policyholder and the insurer. The policyholder can be different from the person whose life is insured. Both Life and Non-Life Insurance Policy is thus a legal contract and hence it must abide by all the 7 clauses of the contract for it to be legally sustainable.