Key Takeaways

  • Consideration in business law refers to something of value exchanged between parties in a contract; it may be money, property, or a promise to act or refrain from acting.
  • Consideration in insurance contracts is essential: policyholders pay premiums, and insurers promise to provide coverage in return.
  • Insurance consideration must meet legal requirements—such as being real, lawful, and not based on fraudulent or impossible promises.
  • Courts may deny insurance coverage if disputes involve “inadequate consideration” exclusions, especially in mergers or acquisitions.
  • Buyers of insurance must evaluate not only cost but also the adequacy of coverage, policy exclusions, and how consideration is legally enforced.
  • Legally sufficient value in insurance includes enforceable promises; vague or moral obligations do not meet the standard.

Elements of consideration in business law include items of value offered by each party of a contract to the other. Consideration can be currency or property, but it can also be a promise to either do or refrain from doing a legal act.

Consideration Guidelines

  • The promisor has the power to take action or forbearance on a specific element of consideration. If consideration is not made by the promisor or a third party, it is not valid. Voluntary acts and services are not consideration. The provision of unwanted consideration does not render one eligible for consideration in return. For example, if you save someone from drowning, he or she is not required to pay you for doing so because rescue was not specifically requested.
  • Consideration can be furnished by the person who promises it or by any other person he or she designates. Indian contract law specifies this as well, though English contract law states that consideration should move only by the promised individual or by one of his or her blood relations.
  • Consideration must be a real item and not an imaginary concept. It may not be a promise to complete an physically impossible or uncertain act. For example, a contract that promises to bring someone back from the dead in exchange for a fee is not legally valid.
  • Consideration may have already been given (past), it can be given at the time the contract is signed (present), or it can be promised by a future date. Although all three types of consideration are valid under Indian law, English contract law does not recognize past consideration.
  • Consideration cannot be fraudulent, be illegal, involve personal injury or property damage, be immoral, or stand against public policy.
  • Equal consideration does not necessarily need to be offered by all parties. Consideration can be grossly inadequate, inadequate, or adequate, as long as all the parties agree. However, it must have some value even if it is very small. For example, if you sign a contract to sell someone your house for $100,000, you cannot later void the contract if you find out the house is worth $200,000. That's because some consideration has been offered even if it is not adequate. Grossly inadequate consideration may be reviewed by the court in the event of a contract dispute.
  • Consideration cannot consist of something the party was already required to do by law since this adds nothing of additional value.

Consideration in Insurance Contracts

In the context of insurance, consideration is what makes the policy legally binding. The insured provides consideration by paying premiums, while the insurer offers consideration by promising financial protection against specified risks. Without this exchange, the insurance contract would not be enforceable.

For example, in a life insurance policy, the premium payments are the insured’s consideration, and the insurer’s promise to pay a death benefit is the counter-consideration. Importantly, consideration in insurance must be:

  • Real and lawful – Premiums must be legally valid, and the insurer’s promise must not involve fraudulent or illegal activity.
  • Mutual – Both sides must exchange something of value. If only one side offers consideration, the contract fails.
  • Enforceable – Promises must create binding obligations, not vague intentions or moral duties.

Because of these requirements, courts often review whether insurance consideration is adequate and enforceable, especially in disputes about denied claims.

Past, Present, and Future Consideration Examples

Past consideration involves something that was already given before the contract was signed. It's sometimes called executed consideration. For example, a person finds a lost wallet and returns it to its owner who promises to pay $100 in one week. The return of the wallet thus constitutes past consideration.

Present consideration, most commonly cash in exchange for goods, is given at the time the promise is made. If you buy groceries for cash, the cash is your consideration, and the groceries are the consideration given by the store. This is a contract even though it is not spoken or written.

Future consideration will be given after the contract is formed. For example, you order a product online that will be delivered in one week. The product is payable when it is delivered.

Practical Examples of Consideration in Insurance

Insurance contracts illustrate the three types of consideration clearly:

  • Past consideration: Generally not enforceable in English law, but an insurer may consider an applicant’s past health information or claim history when issuing a policy.
  • Present consideration: A customer pays a premium at the time of purchasing auto insurance, and the insurer immediately extends coverage for accidents from that moment.
  • Future consideration: Many policies involve ongoing obligations. For example, a business liability policy requires regular premium payments in exchange for future coverage if a claim arises.

Policyholders should also examine exclusions. Inadequate or disputed consideration—such as paying a premium but later challenging coverage for underpayment in an acquisition—can lead to litigation where insurers invoke “inadequate consideration” exclusions to deny coverage.

Legally Sufficient Value

As described above, consideration does not need to be adequate, but it must be bargained for by both parties and legally sufficient. Legally sufficient means that the consideration consists of either:

  • A promise by a party to do something he or she is not legally required to do.
  • A promise to refrain from doing something a party is allowed to do by law.
  • A promise for a party to do something he or she would not otherwise have an obligation to do.

Consideration will not be deemed sufficient by the court when:

  • The obligation is solely moral but not legal.
  • The contract terms are vague and do not actually promise to do or not do something specific.
  • It refers to events that have already happened.
  • The party already has a legal duty to refrain or commit the act in question.

Adequacy of Consideration in Insurance Law

In insurance law, consideration must be legally sufficient, but it does not need to be equal in monetary value. For instance, a relatively small premium can still support a policy that provides millions in coverage, because courts recognize the bargain struck between insurer and insured.

However, disputes arise when the consideration is alleged to be inadequate or misleading. Directors and officers (D&O) policies sometimes contain exclusions for “inadequate consideration.” Courts have held that these exclusions can preclude coverage in cases where claims involve allegations that a company’s shareholders were underpaid during a merger.

Additionally, when buying insurance, policyholders should weigh factors beyond the premium cost, such as:

  • Scope of coverage – Does the insurer’s promise adequately match the risks?
  • Exclusions and limitations – Are there circumstances where the insurer can avoid payment?
  • Clarity of terms – Ambiguities in policy language can undermine the sufficiency of consideration.

These considerations ensure that the exchange between insurer and insured is not only legally sufficient but also practically fair.

Frequently Asked Questions

  1. What is consideration in insurance contracts?
    Consideration in insurance is the exchange of value where the insured pays premiums and the insurer promises to provide coverage.
  2. Why is consideration important in insurance law?
    It ensures the contract is legally enforceable. Without valid consideration, the policy may be void.
  3. Can inadequate consideration affect insurance claims?
    Yes. Some policies include “inadequate consideration” exclusions, which can allow insurers to deny coverage in disputes involving underpayment in transactions.
  4. Does consideration in insurance need to be equal in value?
    No. Courts recognize that small premiums may support large coverage amounts, as long as both parties agreed to the exchange.
  5. What should policyholders consider before buying insurance?
    Beyond premiums, they should evaluate coverage scope, exclusions, clarity of terms, and the adequacy of the insurer’s promise.

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