Insurance contracts are legally binding agreements in which the insurer agrees to indemnify the insured in case he or she incurs losses due to an unforeseen future event specified in the policy.

Understanding Your Insurance Contract: Introduction

An insurance agreement clearly spells out the covered risks, compensation limits, and other terms and conditions of the policy. The terms of insurance contracts differ, depending upon the type of insurance, preference of the policyholder, and the amount of premium.

You should understand your insurance policy beyond its decorative words. Consult your insurance advisor if you need any help in understanding any of the terms of the policy.

Most of us leave almost everything to the insurance advisor, including choosing us a policy and filling out the application form. We try to avoid going through the boring terms of the policy, but it's always helpful to make yourself familiar with them.

Insurance contracts must be made in a legal form. Insurance contracts must comply with the local laws of your state.

The state law may require specific forms to be used for — or specific provisions to be included in — different types of policies. The state insurance department checks and approves insurance contracts. The contracts become enforceable only after such approval.

A contract must contain all the essential elements; otherwise, it becomes void and cannot be enforced by a court of law. If a party violates a contract or hides any important information, the contract becomes voidable, meaning that the other party can cancel the contract.

The party that has the right to void the contract can choose to enforce the contract instead of voiding it. If an insurance applicant provides false information or suppresses any material facts, the insurance company can void the contract.

For example, when a policyholder meets with an accident while driving, and it's found that he had a speeding ticket but left that fact out of his application, the insurance company can void the contract and refuse to pay him the claim.

Although contracts can be oral, most of them — especially insurance contracts — are done in writing, in order to avoid confusion and complications.

Understanding Your Insurance Contract: Offer and Acceptance

  • In insurance contracts, the applicant makes the offer through an insurance agent, representing the insurance company.
  • Often, the applicant can also file the application directly through the insurance company's website.
  • The manner in which the insurance company accepts the offer of the applicant depends upon the type of insurance.
  • In case of a property or liability insurance contract, the applicant makes the offer when he submits the application and pays or promises to pay the first premium.
  • In most of the personal insurance policies, the agent has the authority to accept the offer, binding the insurance company.
  • If there is a typo or some other error in the policy, it can be corrected, irrespective of whichever party stands to get the unjust benefit of such error.
  • Sometimes, agents do not have the power to bind the insurance company. In such cases, the policy comes into effect only after the company accepts the application.


  • Insurance contracts often contain a binder.
  • A binder is a temporary contract that binds the insurance company immediately until it reviews the application and issues a policy.
  • Although an oral binder is equally valid, most of the binders are in writing.
  • They include information like the type of insurance, the amount of insurance, the names of the parties, and the validity period of the binder.
  • As soon as an insurance policy is issued, the terms of the policy prevail over the binder.
  • In case of a conflict, a written insurance policy always prevails over the oral agreement.

Life Insurance Policy

In case of a life insurance policy, agents can never bind the company. Most of the times, the applicant submits the application along with the first installment of the premium. The company then issues a conditional premium receipt to the applicant.

If the company accepts the application and decides to issue the life insurance policy to the applicant, it comes into effect from the date of application. However, in some cases, the policy may become effective only after medical examination.

In case the applicant hasn't paid the first premium at the time of application, the policy does not come into effect until the premium is paid and the policy delivered to the applicant. Additionally, the applicant must be in good health at the time of delivery of the policy, else the policy becomes ineffective.

If you need help with insurance contracts, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.