What is Insurance Contract Law?

Matthew Brodsky

Insurance contract law is based upon several principles, such as indemnity, insurable interest, utmost good faith and warranties. Certain provisions that are regularly found in insurance contracts are required by insurance contract law, leading to consistency in the legal relationship between the insurance company and its customers. Over decades, insurance contract law has developed from court decisions concerning these provisions and these principles in countries around the world.

A courthouse.
A courthouse.

The first principle of insurance contract law is the concept of indemnification, which is the act of making the policyholder whole again after a specifically named peril or loss occurs. There are two types of indemnification: indemnity insurance and on-behalf-of insurance. With the former type of policy, the legal standard is that the insurance company does not have to pay a claim unless the policyholder first pays for the loss out-of-pocket. On-behalf-of insurance simply requires that the insurance company pay a claim. The policyholder does not have to pay for the loss before the claim is paid.

Insurance contract law may vary from jurisdiction to jurisdiction.
Insurance contract law may vary from jurisdiction to jurisdiction.

Insurance contract law in many jurisdictions also includes the principle of insurable interest, which requires that a policyholder suffer a true loss in order to recover on his or her claim. In other words, if the event named in the insurance policy were to occur, it would be detrimental to the policyholder. If the insurable event does not occur, the policyholder is benefited.

Utmost good faith is another important idea in insurance contract law, particularly in common law systems. Policyholders are required to be open and forthright when providing information to the insurance company that would affect whether or not the insurer will write the policy and how it will write the policy. An insurance company can consider a policy null and void if it turns out that the policyholder did not provide information in utmost good faith.

Warranties are important under insurance contract law because of their distinction from insurance policy conditions. The difference between the two determines whether a breach of the contract releases the insurance company from any liability. Insurance contract law views breach of a warranty as more severe than violation of a condition.

The wording of certain policy provisions is important in the law governing insurance contracts. This includes the provision for the indemnification of all stakeholders, including the policyholder, the insurance company and beneficiaries. Specific wording should also state the premium or cost of the policy and the amount of coverage or maximum amount that will be paid to the policyholder in the event of a loss. All insurance policies contain specific exclusions indicating losses that are not covered by the insurance.

It is important to remember that insurance contract law differs by jurisdiction. Every nation has different variations and practices. In some nations, such as the United States, each state may have different laws.

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