BCP CH 5 Law of Contract & Agency

Introduction

• Insurance is a form of contract; thus understanding contract law is essential.

• Focus on the law of agency as insurance agents act on behalf of insurers.

Contracts

Definition and Validity

• An insurance policy serves as the evidence of the insurance contract between the insurer and the insured.

• To be valid, certain conditions must be met for a contract:

  • A contract is defined as a legally enforceable agreement between parties.

  • It comprises promises; however, not all agreements qualify as contracts (e.g., informal dinner plans).

  • Essential example: Insurance contracts require the insured to pay a premium and the insurer to indemnify for insured perils.

Elements of a Valid Contract

A. Intention to Create Legal Relationship

• All parties must intend to enter a legally enforceable agreement.

B. Offer and Acceptance

• Requires a meeting of minds (consensus ad idem).

• An offer can be made orally, in writing, or through conduct.

• Acceptance must be unconditional; any new terms constitute a counteroffer.

• In general insurance:

  • The proposal form can constitute the offer, accepted by the insurer through policy issuance.

C. Consideration

• Consideration refers to what each party gains from the contract (can be monetary or an act).

• Example: Bus fare paid for the right to travel; in insurance, the premium serves as consideration.

D. Capacity to Contract

• Parties must be of legal age and sound mind to enter into a contract; minors have restricted capacity:

  • Minors can enter contracts with parental consent.

  • Special considerations apply to the rights of minors regarding insurance policies.

Vitiating Factors

A. Misrepresentation

• Contracts can be voidable if one party made a misrepresentation that induced the other party to enter it.

  • Must be a statement of fact and material. Must cause detriment if reliant on it.

B. Duress

• Consent obtained under threat can invalidate the contract (e.g., physical harm).

C. Undue Influence

• Occurs when one party exerts excessive pressure on another; typical in trustee/beneficiary relationships.

D. Illegal Contract

• Contracts prohibited by law are void; for example, gaming debts.

E. Mistake

• If parties are mistaken about a fundamental fact, the contract can be void from inception.

F. Non Est Factum

• A principle allowing a person to void a contract if they did not understand its nature due to misconceptions, if they were not negligent.

Law of Agency

A. Agents, Principals, and Third Parties

• Definition of roles:

  • Agent: acts on behalf of the principal.

  • Principal: grants authority to the agent.

  • Third Party: individuals dealing with the agent (e.g., policyholders buying insurance).

B. Creation of an Agency

• Can arise:

  • By agreement (expressed or implied).

  • By ratification of unauthorized acts.

C. Duties and Rights of an Agent

Duties

• Follow the agency agreement, act with reasonable care, and maintain fiduciary responsibilities.

Rights

• Agents have rights to remuneration and indemnity for expenses incurred, but must act within the authority granted.

D. Termination of Agency

• Can occur through:

  • Mutual agreement, expiration of terms, or operation of law (e.g., death of the principal).

• Termination does not affect third parties unaware of the termination.

E. Apparent Authority

• A principal is bound by acts that the agent appears authorized to perform, even if the agent lacks actual authority.

• Third parties can rely on the apparent authority unless aware of its limits.