Insurance contracts, in simple terms, involve the provision of cover from loss(es) by one party called the insurer to another known as the insured (policyholder). As basic as the foregoing sounds, it is important to state that insurance contracts are quite different from ordinary contracts for reasons that would be set forth in this article.

An insurance contract is valid when you have parties, consideration and acceptance of terms like it is the case in regular contracts. The insurer agrees to underwrite the risks which the insured proposes to be protected against. Local regulations also prevail on insurance contracts to which all parties must adhere strictly to. International laws also apply to some types of insurance such as those governing admiralty/marine.

Parties to an insurance agreement must conduct due diligence before putting ink to paper. The foremost legal component of an insurance contract is to understand the limitations under such agreement. This is the point from which most disputes between the parties usually arise. Determining the extent of the risks which the insurer is obligated to compensate for is usually subject to legal suits. It is, therefore, often legally advisable for both parties to study the agreement document properly before signing. For example, an insurance contract which does not list specific anticipatory losses which the insured may suffer means that policyholders may have a hard time getting indemnified. So, if the subject-matter for a household insurance contract is only against loss by fire but the house is destroyed by flood, then the insurer is not bound to indemnify the insured at all.

Another common scenario in a place like Nigeria is what is now widely referred to as “no premium, no cover”. If at the time of loss or damage the insured is in arrears of premium, then by law, the insurer incurs no liabilities.

Further, there might also be limitation laws, such as in Nigeria and Commonwealth countries, where an action in contract cannot be filed by the party who suffers in a court of law after six years have lapsed since the breach occurred. General limitations like wars, acts of nature and riots are also exceptions that prevent insurers from providing indemnity under the insurance contract.

The next legal hurdle to consider in insurance contracts is the issue of fraudulent misrepresentation. All contracts including insurance are entered into on the basis of good faith representations. Each party represents that there is no fraudulent fact which is presented knowingly as being the truth. When an insured party under a life insurance contract, for instance, lies to an insurer about material facts such as age or other pre-existing health conditions – which are reasonably expected to be disclosed – this may be legal ground for such insurer to avoid contractual obligations.

Nigeria’s Insurance Act 2003 addresses fraudulent misrepresentation and states, specifically in Section 69 (3) that no sum shall be payable by an insurer:

“(a) in an action commenced before or within 3 months, after the commencement of the proceedings in which the judgment was given, the insurer has obtained a declaration that apart from any provisions contained in the policy, he is entitled to avoid it on the ground that it was obtained by the non-disclosure of a material fact or by a representation of fact which was false in a material particular;…”

An insurer should be particularly careful when it engages agents to sell insurance. There might be consequences for an insurer whose agent has misrepresented facts to an insured. The principle is that such an insurer is bound by the ostensible acts of its agent as the acts of the agents will be construed as those of the insurer.

Another important legal component is what is known as insurable interest. For general insurance, the policyholder must have an “insurable interest” at the time the contract is entered into. This means that there must be some benefit the policyholder stands to lose if the subject matter is lost or destroyed.

By this rule of insurable interest, no third party has the right to bring a direct action against an insurer. An insured can also not bring a direct action against an insurer’s re-insurer under the doctrine of privity of contract. Insurers, unlike the insured, have the right to bring direct actions against third parties – by subrogation – which gives an insurer standing to sue third parties after indemnity has been paid to the insured. However, one exception to insurable interest general rule is life insurance, where the beneficiary does not need to have insurable interest at the time the contract is made.

Insurance contracts are not all about legal wrangling between the parties that enter them. The benefits of insurance policies on homes, vehicles and life are significant.

The last legal hurdle to be crossed in insurance contracts is settlement of claims. Most insurers take pride in making good their bond that genuine claims will be settled expeditiously. It is not so simple in reality to fulfill this promise taking into cognizance all that has been discussed above in this article. The notorious difficulty in this area is commercial aviation disasters. Airlines are legally bound to insure aircrafts, passengers and cargo. Aviation accident bureaus are normally tasked with investigating airline disasters, which, in truth, takes longer to conduct before the cause of accident is determined. These sorts of delays are likely to affect prompt payment of claims to affected passengers.

It may amount to wishful thinking to presume that all insurance contracts are perfect. Parties under an insurance arrangement must ensure that there is a consensus on all points in the contract. Whether or not disputes will end up in the law courts in the future will partly depend on the circumstance and wordings of each insurance contract.