For all the duplicate and triplicate pages, odd terms, and ‘legalese’, an insurance policy boils down to a contract between the policy owner and the insurance company. Like all contracts, insurance policies must meet the common law definitions of a contract.
1. There must be a ‘meeting of the minds’. For any contract to be valid, both parties must have a clear understanding of what the intent and purpose of the contract is. In very simple terms, if a person purchases a policy in good faith believing it covers their house, when in actual fact it covers their car, there is no meeting of the minds. It is incumbent upon the broker selling the policy to make sure that the buyer fully understands what the policy entails – the courts tend to find for the person who did not draft the contract, or who has the lesser knowledge of the subject matter. However, the phrase ‘in good faith’ is key.
A person cannot feign ignorance when they should have known, or any reasonable person would have known the extent of the contract. In our case above, if the description of the vehicle is clearly shown on the policy, then that person should have realized that the policy was dealing with their car and not their home. They cannot reasonably argue in the event of a loss that they thought the coverage was on their car.
2. There must be ‘consideration’. Consideration is some form of payment from the person receiving the service to the person or entity performing the service. In other words, a free insurance policy is not valid – the person must have made some payment or given something up in order for it to be valid. Consideration can be money, an exchange of goods (barter) or services, and it can even be paid on that person’s behalf by someone else – but it must be paid.
3. The contract cannot involve goods or services which are illegal. This is why, in states or provinces where radar detectors are illegal, car insurance policies will exclude any coverage for them. The idea being that the contract must be enforceable in a court of law, and it goes against ‘public decency’ for the courts to enforce a contract that involves illegal activity.
4. In the case of insurance, the person buying the policy must have an ‘insurable interest’ in the property being insured. An insurable interest means that the person is at some financial risk should the property be destroyed or damaged. We’ve heard about the strange insurance policies that Hollywood takes out on actors and actresses body parts – back in the day, Lloyd’s of London insured Betty Grable’s legs for example. The studio that held the policy stood to lose money if something should happen to Ms. Grable or her legs – therefore, they had an insurable interest and could take out the policy.
Because insurance policies are contracts, they are governed by contract law. This means that in the event of a dispute over the terms of the contract, the settlement of the dispute is bound by contract law rather than civil law. How does that affect the settlement? We are most familiar with tort law, even if we don’t understand the terminology.
A tort is a wrongdoing which causes some sort of injury or loss to a person through the other party’s negligence. A car accident for which a person is at fault and injures another person is a tort. Under tort law, the injured party can recover the costs associated with their injuries, such as medical expenses and lost wages, but also awards for pain and suffering for the inconvenience and loss of enjoyment of life they have suffered as a result of the injury.
These types of awards are called ‘general damages’ because they cannot be quantified in strict dollar amounts. On the other hand, if a person is in a car accident of their own doing and their insurance company refuses to provide the coverage in the policy, then the person is only entitled to recover what should have been covered by the contract. In our example, if the person had collision coverage, and the company refused to provide the cost of repairs to the vehicle, that person could take the company to court.
However, the only thing they could win from the company would be the cost of repairs to the vehicle as outlined in their contract – nothing for their inconvenience. There are exceptions to this, when the actions of the company are so ridiculous that they clearly knew they had an obligation but just simply refused to pay. In such a case, the judge may determine that ‘punitive damages’ can be awarded in order to punish the company and discourage them from trying the same thing again.
Insurance and contract law can be intimidating to the uninitiated because the language and terms are somewhat convoluted, and worse yet, in Latin. But the concepts involved are really based in common sense and what reasonable people would do. The most important thing to remember is that an insurance policy is a contract, and it is important, like all contracts, to understand what it is you are signing before you sign it. It is your broker or salesperson’s responsiblity to make sure that you do, so do not hestiate to ask questions before you sign on the dotted line.