Basics of an insurance contract

Philosophy of insurance:

• It is an aleatory contract

• Insurances are cooperative devices.

• They aim to spread and transfer the risk of a certain occurrence to several people.

Advantages of Insurance

• Transfer of loss

• Provides social security

• Contributes to the development of the economy

• A tool of investment

• Gets the people into the habit of spending

So insurance is…

Insurance is a contract between the insurer and the insured whereby, in consideration of payment of a premium by the insured, the insurer agrees to compensate any financial loss which occurs due to an expected risk.

It is defined by the ECC in the article (747):

“Insurance is a contract whereby the insurer undertakes to pay to the assured or the beneficiary for whose benefit the insurance is stipulated, a sum of money or annuity or any other pecuniary compensationion upon the occurrence of the event of the risk specified in the contract, in exchange of a premium or any other pecuniary payment paid by the insured to the insurer“.

Parties of the contract

1. The insurer is the person taking the risk, and agreeing to indemnify or pay a certain sum on the happening of the particular event insured against

2. The insured is the person paying the premium

3. The beneficiary is someone other than the insured who benefits from the compensation paid by the insurer. If such is the case, then the policy should nominate the beneficiary.

Note: the beneficiary will remain a third party and will not be considered as a party of the insurance contract including the stipulation for his benefit.

Characteristics

• A nominated contract is governed by special rules that may differ from the general rules of contracts.

• Bilateral Contract that places obligations upon both sides. Accordingly, the insurance company has the right to use the tacit (implied) resolutive condition to dissolve the contract at any time if the insured didn’t perform his obligations, even if there’s no express agreement giving it the dissolution right.

• An aleatory contract i.e. there is no equal exchange of value.

• The insured must have an insurable interest of enough relevance for the insurance company to take the risk.

Types

1. Life Insurance

   1. Term-life insurance

      It is a policy purchased for a certain period, be that 10, 15, 20, or whatever years, whereby the insurance company pays out only if the insured dies during that period or after the lapse of that period whichever variable is sooner.

   2. Whole-life insurance (cash-value life insurance)

      In the advent of death whenever it shall happen, the insurance company provides coverage and pays a certain amount of compensation to the beneficiary based on the premiums paid by the insured during his lifetime.

2. Non-life insurance

   1. Health insurance:

      • A contract between a health insurer and a policyholder that requires the health insurer to pay for all or at least a portion of medical costs

      • Includes both expected and unexpected medical occurrences

   2. Fire insurance:

      • A form of property insurance that covers damages and losses caused by fire

      • Includes damages caused by the fire as well as damages caused by fire-extinguishing substances

   3. Burglary insurance

      A form of property insurance

   4. Marine insurance

      • a form of insurance that covers cargo losses or damages caused to ships, vessels, terminals, or cargo.

   5. Vehicle insurance

      • Obligatory car insurance: It is obligatory for anyone who obtains or renews a car’s license to purchase a policy from the various car insurance companies located inside each local Department of Motor Vehicles office. Compulsory car insurance covers damage caused to a third party by the car owner.

      • Optional/ supplementary car insurance: It aims to insure the car itself against damage resulting from accidents.

   6. Travel Insurance

      • covers trip cancellation, lost or misplaced luggage, travel accidents, and medical expenses while on a trip.

Formation of an insurance contract

General requirements of insurance:

1. Consent

• Existence:

  • By a clear valid offer proposed by the insured and;

  • A clear valid acceptance by the insurance company who may or may not accept the offer

• Validity:

  • Full legal capacity

  • Free consent i.e. void of any fraud, mistake, exploitation, or duress.

    • If the insurance contract is vitiated by any of these vices, it would be voidable at the option of the vitiated party.

    • According to the general rules of contracts, fraud can only be achieved through positive acts i.e. silence is not considered a fraudulent act. However, in an insurance contract, intentional silence and withholding of facts is considered fraudulent and renders a contract voidable.

      The only exception to this rule is when silence is made in good faith. If such is the case, the contract will be valid and the insurer will have the choice between increasing the regularly paid premiums or decreasing the deductible.

2. Object

I) Risk

a) The risk insured against should be (conditions):

• An uncertain, future and possible event;

• To its actual happening i.e. risk of a car accident, death in a plane, or an outbreak of fire.

• To the date of its happening i.e. the risk of death, as it is inevitable though unknown in timing.

• Independent from the parties will

  • i.e. that it doesn’t happen out of one’s voluntary will. This means that insurance coverage extends to damages resulting from force majeure or a third party’s fault.

  • Exceptions:

    - Intentional suicide attempts

    1. In the case of life insurance, coverage extends to intentional suicide if such an attempt is a result of mental illness.

    2. If there is an express agreement between the insurer and the insured that the policy will cover harm resulting from suicide given that 2 years, aka an exclusion period, have passed since the conclusion of the contract.

    - Intentional fault to achieve a greater aim (in some countries)

    1. Legitimate defense

    2. Avoiding greater harm

    3. Achieving a greater human interest

• Legality i.e. one can’t insure a drug-trafficking business or public properties.

b) Types of Insurable risk

• Subject matter

  • Personal

  • Property

• Liability

  • Personal liability insurance

  • Third-party liability insurance

• Stability

  • Stable risk:

    Risks that have the same percentage of occurrence within the whole duration of the contract.

  • Variable risk

    Risks that have changing percentages of occurrence i.e. whole life insurance; if one purchases an insurance policy at the age of, say, 20 and let’s say that an average life expectancy of a US citizen is 77 years (give or take) then the mortality rate would be 20% so his premiums will be much cheaper than when a middle-aged, avid smoker, with a most-likely lung cancer awaiting him down the road, purchases a policy. The older one gets a higher death risk probability and consequently a higher premium.

II) Premium

A premium is…

The amount you pay for an insurance policy in exchange for loss coverage resulting from the risk insured against.

Calculating the premium

1. Proportionality

   1. Probability of the risk

      1. The premium should be calculated proportionally and statistically according to the risk insured against. “premium ∝ deductible + risk”

      2. Proportionality should remain a factor in calculating the premium throughout the entire duration of the contract to ensure that the premium is exactly in proportion with the deductible whether that would mean increasing or decreasing it.

   2. Damage Coverage

      1. Risk

         1. The premium should be calculated proportionally and statistically according to the risk insured against. “premium ∝ deductible + risk”

         2. Proportionality should remain a factor in calculating the premium throughout the entire duration of the contract to ensure that the premium is exactly in proportion with the deductible whether that would mean increasing or decreasing it.

      2. Coverage extent

         1. Full coverage is when the deductible covers all damages caused by the risk insured against regardless of its extent.

         2. Partial coverage: describes a situation where insurance policies do not cover all the damage and will only pay a portion of the bill or sets a maximum on the deductible to be paid.

2. Duration

   1. The longer the insurance while the risk is stable, the lower the premiums will be. Ex. fire insurance.

   2. The longer the insurance whereas the risk is variable, the higher the premiums get over time. Ex. life insurance.

3. Expenses

   i.e. expenses needed to run the business itself, such as salaries, collecting fees, taxes… et cetera.

4. Investment & profit

   Most insurance companies will invest using the premiums.

III) Deductible

• determining the sum of the deductible will depend on the same calculations mentioned above with the general rule that this indemnification should not be the value of the actual damage sustained by the insured.

IV) Insurable interest

• A real economic pecuniary interest

• A legitimate interest

3. Cause

Follows the general rules of contracts…

The cover note

• It is a temporary policy that covers the interval period between presenting the proposal of insurance and the final decision of the insurer.

• It doesn’t turn into permanent one even if the insurer took a long period to reply

• It doesn’t execute the terms of the insured proposal, it only includes general terms providing partial coverage

• It is terminated by the issuance of final decision by refusal or acceptance.

Compulsory car insurance

Concept

It is an insurance contract enforced by law and made by the car owner to insure his civil liability for its accidents for the benefit of others who sustained property damage or bodily injury.

It is regulated by law no. (72) of 2007

Effects

Article (1/2) of law 72 states that “the insurance includes cases of death and bodily injury as well as material damage to the property of others, except for vehicle damage.”

i.e. An insurance company will only compensate:

1. Death

2. Permanent injury

3. Partial injury

4. Damage to property that is not classified as vehicles.

∴ Accordingly, the law states that “the amount of insurance paid by the insurance company is forty thousand pounds in cases of death or permanent total disability, and the amount of the insurance amount in cases of permanent partial disability is determined by the percentage of disability. It also determines the amount of insurance for damage to the property of others, with a maximum of ten thousand pounds.”

Example

So if someone was walking in the street and was by a speeding car but didn’t result in any bodily inability. It did, however, smash the laptop he was carrying

In this case, the maximum amount he can take based on the compulsory car insurance will be 10 thousand pounds for his property damage.

But if the laptop is worth 20 thousand including 10 years’ worth of work then he has the right to submit a liability case against the car driver asking for complementary compensation based on the general rules of tortuous liability.