Ent 121 - 44-47

ENT 121 PRINCIPLES AND PRACTICE OF INSURANCE
UNIT 4 GENERAL PRINCIPLES OF INSURANCE
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 The Nature of Insurance Contracts
3.1.1 Offer and Acceptance
3.1.2 Consideration
3.1.3 Legal Capacity of Parties
3.1.4 Consensus and Idea
3.1.5 Legality
3.1.6 No Mistake
3.1.7 No Representation or Fraud
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Readings
1.0 INTRODUCTION
An insurance contract is an agreement between an insurance company

and the individual effecting the insurance cover. Such an individual is
referred to as the insured.
An insurance contract falls under the general heading of simple

contracts. Hence, it is a “legally binding agreement” made between two
or more parties, by which rights are acquired by one or more to act or
forbearances on the part of the other parties.
Generally persons who effect insurance do it either because they are

legally required to do so or they cannot accommodate the risks
themselves or both.
2.0 OBJECTIVES
At the end of this unit you should be able to:
explain the principle of contract as it relates to insurance

define insurance contract and the rules applying to insurance.
37
3.0 MAIN CONTENT
3.1 The Nature of Insurance Contracts
Insurance contracts must satisfy the requirements of simple contracts.
These requirements are considered below.
3.1.1 Offer and Acceptance
An offer is a communication of the contract terms by one party to

another. Acceptance refers to the letter’s agreement of those terms.
In motor insurance contract, the offer is made by the proposer when he

completes a proposal form. The insurer accepts by issuing a cover note.
However, where an insurer, imposes additional terms then the insurer
has made a counter offer which is assumed accepted by the proposer on
his agreement to pay the premium based on the new terms.
3.1.2 Consideration
Consideration refers to the gain or benefit received by one party in

return for a promise or the performance of an act of another. In an
insurance contract, the consideration consists on the one hand of the
insurer’s promises to compensate the insurer for a loss, and on the other
hand of the premium payment by the insured, to the insurer. The
promise to make good any loss suffered by the insured is the
consideration of the insurer. However, while the insured’s consideration
is available at the beginning of the contract that of the insurer shall be
available at some future date.
3.1.3 Legal Capacity of Parties
Certain categories of persons are not qualified to enter into insurance

contracts. These include persons of unsound mind and minors.
Therefore contracts made by them may be set aside.
3.1.4 Consensus and Idea
This Latin expression means “in complete agreement of mind”. With

respect to motor insurance, for instance, this implies that both the
proposer and the underwriter must be falling about the same or and for a
particular scope of cover. Hence, if the proposer aims at using his
38
vehicle for commercial purposes, the underwriter must not assume that
the vehicle is to be used for private and social purposes.
3.1.5 Legality
Contracts must not be illegal, that is, they are invalid if they are
forbidden by statute or are against what is called public policy.
3.1.6 No Mistakes
There must not be a mistake in making the contract. If one or both of the
parties to a contract makes a mistake in the process of making the
agreement, the effect of such a mistake depends on the nature of the
error. A mistake may make the contract invalid where there is no
agreement over the contract.
3.1.7 No Misrepresentation or Fraud
A representation is a factual statement made by one party to the other

which is intended and succeeds in persuading the latter to enter into the
contract. If such a statement is false it is a misrepresentation. If
misrepresentation is fraudulent, the insured party can:
Carry on with the contract; or

He can claim damages if he has suffered a loss, and
He can either refuse to perform the agreement or rescind the
contract.
SELF ASSESSMENT EXERCISE
1. What is a contract of insurance?

2. List four of the features essential to make any contract legally
enforceable
3. What is a policy document
4.0 CONCLUSION
We have explained the principles of insurance contract, the definition of

insurance contract and the rules governing insurance contracts.
5.0 SUMMARY
A contract is an agreement between two or more participants which is

legally binding. A legally binding agreement between the buyer (the
insured) and the seller of insurance (the insurer is a contractor of
insurance).
39
In a contract of insurance, the insurer and the insured must agree on

details such as the price, the effect and nature of cover and so on. These
terms are usually set out by the insurer in a document called the policy.
Consideration consists of the insurer’s promising to compensate the

insured for a loss and the insured paying their premium.
All parties to a contract must have legal capacities to enter into

agreement and there must be an agreement of mind.
Also, the contract must not be illegal, it must have no mistakes and no
misrepresentation or fraud.
6.0 TUTOR-MARKED ASSIGNMENT
1. Write short notes with examples on the following:
a) Offer and acceptance in insurance contract

b) Consideration in insurance contract.
2. Give the definition of the contract of insurance with examples.

3. “Consensus adIdem”, is a Latin expression. Explain the meaning
with an example.
7.0 REFERENCES/FURTHER READINGS
Green,M & Trieschmann, J.S. (1978). Risk and Insurance (5th ed).
South Western Publishing Company.
Carter, D.L. (1973). Risk Management. Cambridge London: The

Bustunton Press.
40

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ENT 121 PRINCIPLES AND PRACTICE OF INSURANCE

UNIT 4 GENERAL PRINCIPLES OF INSURANCE

An insurance contract is an agreement between an insurance company

An insurance contract falls under the general heading of simple

Generally persons who effect insurance do it either because they are

At the end of this unit you should be able to:

explain the principle of contract as it relates to insurance

3.0 MAIN CONTENT

3.1 The Nature of Insurance Contracts

Insurance contracts must satisfy the requirements of simple contracts.

These requirements are considered below.

3.1.1 Offer and Acceptance

An offer is a communication of the contract terms by one party to

In motor insurance contract, the offer is made by the proposer when he

Consideration refers to the gain or benefit received by one party in

3.1.3 Legal Capacity of Parties

Certain categories of persons are not qualified to enter into insurance

3.1.4 Consensus and Idea

This Latin expression means “in complete agreement of mind”. With

3.1.7 No Misrepresentation or Fraud

A representation is a factual statement made by one party to the other

Carry on with the contract; or

SELF ASSESSMENT EXERCISE

1. What is a contract of insurance?

We have explained the principles of insurance contract, the definition of

A contract is an agreement between two or more participants which is

In a contract of insurance, the insurer and the insured must agree on

Consideration consists of the insurer’s promising to compensate the

All parties to a contract must have legal capacities to enter into

6.0 TUTOR-MARKED ASSIGNMENT

1. Write short notes with examples on the following:

a) Offer and acceptance in insurance contract

2. Give the definition of the contract of insurance with examples.

7.0 REFERENCES/FURTHER READINGS

Carter, D.L. (1973). Risk Management. Cambridge London: The

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