BCP CH 5 Law of Contract and Agency in Insurance

INTRODUCTION

• In this chapter, we cover the law of contract, which is important because insurance is a form of contract.

• We will also discuss the law of agency, focusing on insurance agents authorized by insurers to act on their behalf (e.g., selling or arranging insurance).

CONTRACTS

General Insurance Policy

• A general insurance policy serves as the evidence of an insurance contract between the insurer and the insured.

• Obligations of the insurer and rights of the insured are defined by the contract.

Definition of a Contract

• A contract is defined as "an agreement enforceable by law."

• It can also be described as a "legally binding agreement" between two or more parties involving a promise or a set of promises.

• Not all agreements are contracts; for example, an agreement between friends to dine does not have legal enforceability.

• Insurance contracts are enforceable agreements that create legal rights and obligations.

Elements of a Valid Contract

1. Intention To Create Legal Relationship

   • All parties must intend to establish a legal relationship that they can enforce. If intention is absent, a contract doesn't exist.

2. Offer & Acceptance

   • A mutual agreement (meeting of minds) between parties is required.

   • An offer can be made orally, in writing, or through conduct and must be unconditionally accepted to form a contract.

   • Conditional acceptance becomes a counteroffer.

   • An insurance contract may also involve repeated negotiations and counteroffers before acceptance.

   • The contract may specify when coverage starts (e.g., future date), and the insurer may require premium payment before coverage commencement.

3. Consideration

   • Consideration is the return promise or payment necessary for a contract to be binding, something must be given or promised in return.

   • For example, in a Personal Accident Insurance contract, the premium constitutes the consideration.

4. Capacity To Contract

   • Only individuals of legal age and mental competence can enter contracts.

   • Minors (below 18 years) have restricted capacities:

     • Minors aged 10-15 can enter insurance contracts with parental consent.

     • No rights for minors to assign, mortgage, or surrender policies until 18.

VITIATING FACTORS

Factors that may invalidate the contract:

1. Misrepresentation: A contract can be voided if made based on misleading information. Key points:

   • False statement must be factual and made by a party to the contract.

   • Misrepresentation must have materially affected the other party's decision to contract.

2. Duress: Contracts formed under threat or coercion are invalid.

   • The threat must involve actual harm or a significant threat to a party's well-being.

3. Undue Influence: Occurs when there is an imbalanced relationship, causing one party to dominate the other's will. Examples include relationships such as guardian-ward or trustee-beneficiary.

4. Illegal Contract: Contracts forbidden by law are automatically void. Example: gambling contracts as per Singapore's Civil Law Act.

5. Mistake: Contracts based on misassumptions of key facts can be void ab initio (as if they never existed).

6. Non Est Factum: A party can challenge a contract stating, "This is not my deed" if they intended to sign something different, not due to carelessness.

LAW OF AGENCY

Description of Agency

• Agency involves relationships between three parties: the agent, the principal, and third parties.

  • Agent: Acts on behalf of the principal.

  • Principal: Authorizes the agent.

  • Third Party: The other party in transactions involving an agent.

Creation of an Agency

• Created through:

  • Agreement: Express or implied agreement between agent and principal.

• Types of agency include:

  • Express Agency: Clearly communicated authority.

  • Implied Agency: Authority inferred from conduct.

  • Ratification: Validates unauthorized acts of an agent if the principal approves them later.

Duties and Rights of Agents

Duties of Agents:

1. Act according to agency agreement without exceeding authority.

2. Exercise reasonable care and skill.

3. Perform with dispatch and report accurately.

4. Maintain fiduciary duty: must not conflict with the principal's interests or hide advantageous situations.

Rights of Agents:

1. Right to remuneration as set in an agreement.

2. Right to compensation for reasonable expenses.

3. Right of lien over property for payment due from principal.

Termination of Agency

• Agencies can end by

  • Agreement, revocation by the principal, or completion of a task.

  • Death or mental incapacity of either party can also terminate the agency.

• Apparent authority can still bind the principal with a third party even after termination unless the third party is aware of the termination.

Agents' Authority

• Authority consists of:

1. Actual or Express Authority: Given explicitly by principal to agent.

2. Apparent or Ostensible Authority: Authority perceived by outsiders, which may bind the principal even against their actual restricted authority.

By understanding these concepts related to contracts and agency, we can better navigate the legal implications inherent in the insurance industry.