Essentials of an Insurance Contract


For a contract of insurance to exist, there must be an agreement under which the insurer is legally bound to compensate the other party or pay the sum assured [premium]. This is the consideration that passes between the parties to support the transaction. It is asserted that premium is the considerations which the insurers receive from the insured in exchange for their undertaking to pay the sum assured in the vent insured against. Any consideration sufficient to support a simple contract may constitute a premium in a contract of insurance.

The insurance contract is aleatory or contingent or speculative as it deals with uncertain future events. For an event to be Insurable it must be characterized by some uncertainty. In the words of Channel J in Prudential Assurance CO. Ltd Vs Inland Revenue Commissioner “then the next thing that is necessary is that the event should be one which involves some amount of uncertainty. There must b either some uncertainty whether the event would ever happen or not, or if the event is one which must happen at some time or another, there must be uncertainty as to the time at which it would happen”

The insurable event must be of an adverse nature .i.e. the insured must have an Insurable interest in the property, life or liability which is the subject of the insurance. Insurable interest is said to be the pecuniary or financial interest which is at stake or in danger if the subject matter is not insured. It is a basic requirement for the contract of insurance.
The insurable event must be beyond the control of the party assuring the risk. Re Sentinel Securities P.L.L [1996] I WLR 316

Insurance can only be effected where loss is accidental in nature or is a consequence of a negligent act or omission. Loss occasioned by intentional acts does not qualify for indemnity or for payment of the sum assured. Toxleth Vs Hampton, Hall D. Ath Vs British Prudential Assurance [1932]48 LT 240.

  1. RISK
This is the central problem that insurance attempts to address. It is understood to mean that in a given situation, there is uncertainty about the outcome and a possibility exists that the outcome would be unfavorable. Risk has been defined as the chance of loss, the probability of loss of loss or the probability of any outcome different from the one expected. It is a condition in which there is a possibility of an adverse deviation from a desired outcome that is expected or hoped for. For individual proposes, risk is measured by the probability of loss as the individual hopes that it would not occur.

The probability that it could occur is used to measure the risk. However, where a large number of exposure units- policies- exists, it is possible to predict the probability of loss which is the probability of an adverse deviation from the expected outcome. The standard deviation is used as a measure of risk. The higher the probability of loss the greater the risk as the greater the possibility of loss the greater the probability of a deviation from what is hoped for.
Risk differs from peril and hazards. A peril is the cause of loss while a hazard is a condition that may create or increase the chance of a loss arising from a given peril.


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