The insurance contract is the agreement by which the insurer, in exchange for the payment of a price, called premium, by the policyholder, undertakes to compensate for a damage or to pay a sum of money to the other party, the policyholder, upon the occurrence of the eventuality foreseen in the contract. The insurance contract may cover all kinds of risks if there is an insurable interest, unless expressly prohibited by law.
The contracting party or policyholder, who may or may not coincide with the insured, is obliged to pay the premium in exchange for the coverage granted by the insurer, which prevents him from facing a greater economic loss in the event of a loss occurring.
The insurance contract is consensual; the reciprocal rights and obligations of the insurer and the policyholder begin as soon as the agreement has been entered into, even before the issuance of the “policy” or document reflecting data and conditions of the insurance contract.
Insurance is the mechanism by which those who bear risks can transfer them to the insurer, who undertakes to indemnify them totally or partially for the losses that the risks may cause. By entering into an insurance contract, an attempt is made to obtain economic protection for property or persons who may suffer damage in the future.
Insurance has a dual function: economic and social.
- Economic function: eliminates economic uncertainty about the future, increasing efficiency, stabilizes wealth, combats poverty and stimulates savings.
- Social function: stimulates foresight, contributes to the improvement of health.
Personal elements of insurance contract
The following subjects are included in the contractual relationship:
The insurance entity may be defined as “the legal entity that, constituted in accordance with the provisions of the corresponding legislation, undertakes to assume the risks of others, complying with the provisions of such legislation, by means of the collection of a certain price called premium.
In the figure of the insurer, it is worth highlighting some specific profiles, among which we can appreciate the following:
- By legal imperative, it must be a legal entity. It is not even possible for an individual to carry out risk coverage operations on an occasional basis. The operating conditions of the insurance and its projection over time already require, by themselves, that the insurer be a legal entity;
- That person must be precisely one of the forms that the law considers only valid for the practice of the insurance industry;
- It must have been previously approved by the Public Administration to act as an insurer;
- It must be exclusively engaged in the practice of insurance or reinsurance, if any, with no other type of activities being admissible, except for collective retirement fund management operations;
- They must adjust their situation to the rules of insurance legislation, which regulate in detail the insurance practice, and at the same time they are subject to inspection and control by the public authorities.
Within the broad spectrum of possible legal entities are assumptions admitted as valid:
- Limited Liability Company.
- Fixed premium mutual company.
- Mutual benefit plans.
- Cooperative Society.
Insurance is a matter that affects the whole community, and is directly connected with the welfare of the community and whose indispensable basis is trust and credit. Entities wishing to act as insurers are required to comply with a double series of formalities, both legal and economic, depending on the entity they wish to form to provide insurance.
The policyholder is the natural or legal person who contracts and subscribes the insurance policy, on his own behalf or on behalf of a third party, assuming the obligations and rights established and seeks to transfer a certain risk to a third party (insurance company) so that he or a third party may be compensated for the damages or losses that may derive from the occurrence of an uncertain event at the date of the insurance contract. For this purpose, he shall pay a payment (premium) to the insurer.
The insured may be defined as the holder of the area of interest that the insurance coverage concerns, and of the right to the indemnity to be paid in due course which, in certain cases, may be transferred to the beneficiary. He is the natural or legal person who will be most directly affected by the occurrence of the loss. In short, it is the person on whose head or property the consequences of the loss will fall. The figure of the insured is essential within the insurance contract. Because just as it is not possible to conceive of a contract of that nature without the existence of a risk to be covered, neither is it possible to conceive of a legal business of the aforementioned nature without there being a person or final recipient of the guarantee agreed upon, and whose interests, thus protected, are the efficient cause of the contract.
This is the person who is entitled to receive the benefit from the insurer. The figure of the beneficiary is particularly relevant in personal insurance, since they are often intended to benefit a third party, and even in certain modalities this is necessary, as in the case of death insurance.
The beneficiary is also the person who will receive the benefit of the insurance when the event contemplated therein occurs (without being insured). He is the one on whom the benefits of the agreed policy fall, by express will of the policyholder. The designation of the beneficiary responds to certain foresight approaches that correspond to personal insurance, especially to life and accident insurance, in the event of the insured’s death.
Formal elements of the insurance contract
Proposal: it is a good faith contract, where the company believes what the proposer (client) declares in order to assess the risk and thus determine the cost and scope of the insurance.
Policy: this is the main document that implements the insurance contract, containing the rights and obligations of the parties. It is a private contract, normally drawn up on several pages, which includes the general and specific conditions. The general conditions, which are unique for all the insured, are the set of basic principles established by the insurer to regulate all the contracts formalized in a given branch or product, such as the way in which indemnities are settled or premiums are collected, mutual communications between the insurer and the insured, etc. They also include the definitions and exclusions generally applicable to the insurance contract. The policy shall contain, as a minimum, the following indications:
- the names, addresses of the contracting parties and signature of the insurance company;
- the designation of the thing or person insured;
- the nature of the risks guaranteed;
- the time from which the risk is guaranteed and the duration of this guarantee;
- the amount of the guarantee;
- the insurance premium;
- the other clauses that must be included in the policy in accordance with the legal provisions, as well as those lawfully agreed upon by the contracting parties.
Actual elements of the insurance contract
These are those elements that, if not concluded, do not allow the existence of the insurance contract:
- the insurable interest
- the insurable risk
- the premium
- the insurer’s obligation to indemnify
The insurable interest
In general, the immediate object of the contract is the obligation constituted by it, but as the latter, in turn, has as its object a performance to give, to do or not to do, the things or services that are the subject matter, respectively, of the obligations to give or to do are ordinarily called the object of the contract.
The main obligation of the insurer is to protect the interest threatened by the insured risk, as long as the loss has not occurred, and this obligation becomes that of indemnifying the damage caused, if the loss occurs.
By interest is meant the lawful relationship of economic value over an asset. When this relationship is threatened by a risk, it is an insurable interest.
The insured interest necessarily has an economic value, which in some insurances (those of things) is determined a posteriori by means of the corresponding expert appraisal, and in others (those of persons) it is determined a priori, contractually or legally. However, in those insurances, at the time of formalizing the contract, the insured unilaterally fixes the amount that he considers sufficient to repair the damage in case of loss, this amount called insured sum, represents the approximate value of the interest, serves as a basis for calculating the premium (the higher the sum, the higher the premium) and as a contractual limit to the future benefit of the insurer. Ideally, there should be a coincidence between the value of the interest and the sum insured, but a discrepancy is always possible, since, as we have said, the latter is freely fixed by the insured and, deliberately or by mistake, may be set at an amount different from the value of the interest.
In principle, all tangible (cars, homes, businesses, etc.) and intangible (economic losses, paralysis of activity, etc.) things can be insured; in addition, life and property can be insured. In order for the thing to be insurable, it must meet the following requirements:
- It must be a corporeal or incorporeal thing.
- The thing must exist at the time of the contract, or at least at the time when the risks or damages begin to run.
- The thing must be assessable in money.
- The thing must be the subject of a lawful stipulation.
- The thing must be exposed to loss because of the risk run by the insured.
The insurable risk
The purpose of insurance is to provide economic security against risk; this purpose is achieved not by the suppression of the feared event (fire, death, illness, etc.), but by the certainty of having an economic compensation when the feared damaging event occurs.
From a legal point of view, risk is an essential element of the contract and consists of an event that is uncertain as to the event itself or as to the time of its occurrence, or as to the amount of the effect. Risk is the possibility of the occurrence by chance of an event producing an economic necessity. This pecuniary need may be concrete, as in the case of insurance against damages, or abstract, as in the case of personal insurance or, more precisely, in the case of insurance of sums insured, especially life insurance.
Without risk, there can be no insurance, because in the absence of the possibility of the damaging event occurring, there can be no damage and no indemnity can be considered. Risk has certain characteristics, which are as follows:
- It is uncertain and random.
- Possible. The impossible does not originate risk. It must be uncertain, because if it is necessarily going to happen, no one would assume the obligation to repair it.
- It is concrete.
- It is lawful.
- It is fortuitous.
- It is of economic content.
In the insurance contract, the insurer cannot assume the risk in an abstract manner, but it must be duly individualized, since not all risks are insurable, which is why they must be limited and individualized within the contractual relationship.
The insurance premium or price
The premium is one of the indispensable elements of the insurance contract. It is the insurance price or consideration established by an insurance company, calculated on the basis of actuarial and statistical calculations, taking into account the frequency and severity of occurrence of similar events, the history of events occurring to the client, and excluding internal or external expenses incurred by the insurer.
Unless otherwise agreed, if the premium has not been paid before the occurrence of the disaster or accident, the insurer is released from the obligation contracted in the contract. Also, unless otherwise agreed, it is paid in cash; its payment is mandatory for the policyholder or contracting party according to the conditions established in the insurance policy.
The obligation of the insurer to pay the sum insured
This element is transcendental because it represents the cause of the obligation assumed by the policyholder to pay the corresponding premium. Since the policyholder is obliged to pay the premium because he expects the insurer to assume the risk and comply with the payment of the indemnity in case the loss occurs.
This obligation depends on the realization of the insured risk. This is only a consequence of the insurer’s duty to assume the insurable risk. And although the loss may not occur, this does not mean the absence of the essential element of the insurance that now concerns us, since this is configured with the assumption of the risk by the insurer when entering into the insurance contract, the indemnity being payable only in the event of the occurrence of the loss.
Special clauses of the insurance contract
The distinction between delimiting clauses and limiting clauses has been much discussed both by doctrine and case law.
Delimiting clauses: Their purpose is to delimit and/or specify the content and scope of the contract; they are precisely those used to determine the object of the contract, i.e. the risk. Therefore, they delimit the insured’s own risks, and consequently are neither prejudicial nor limiting.
Limitation clauses: These restrict, modify or simply condition the insured’s right to the indemnity or benefit guaranteed in the insurance contract, when the insured risk has actually occurred. Injurious clauses: These are clauses that considerably and disproportionately reduce the right of the insured, emptying it of its content, making it practically impossible to access the coverage of the loss. In short, they prevent the effectiveness of the policy.
The insurance agent is the intermediary between the company and the client, and in order to act as an intermediary he must be authorized both by the company he represents and by a governmental body that oversees him. He is authorized to verify that the risk exists and that it is insurable.
Overinsurance and underinsurance
The insured risk cannot be significantly higher or lower than the actual value of the insured thing or interest (sum insured), so that a prudent valuation of the insured object is essential. In the first case(overinsurance) when the loss occurs, the insurer will only indemnify the damage up to the actual value of the thing, even if the insured is higher. In the case of underinsurance, the company will indemnify in the same proportion in which it covered the insured interest.
This is not the case when it comes to life insurance, since in this type of contract a person can be insured with more than one life insurance policy, from one or several companies, but it is advisable when taking out the second life insurance policy, to inform in the declaration of application, about the accumulation of the capital sums contracted in the first policy and so on. Therefore, if an insured has a life insurance policy, buys a house and takes out a new life insurance policy to cover the value of the mortgage, in the event of death, the beneficiaries designated in the policies will be paid from both policies. Only in the event that there is an assignment of rights clause in favor of the financial entity, the company will request the bank to inform it of the outstanding capital of the mortgage, in order to pay the bank first and once the debt is paid off, if there is a surplus, it will be paid to the beneficiaries designated in the policy.