The elements of a legally valid contract


Describe the elements of a legally valid contract and how those elements apply in an insurance transaction

Property & Casualty Insurance


Elements OF A valid Contract

Now that you’re familiar with some of the principles of insurance,

look more closely at the insurance contract itself.let’s

You’re probably familiar with the term contract. A contract is a legal agreement between two competent parties that promises a certain performance in exchange for a certain consideration. 

When an insurance company agrees to pay for an insured’s losses in exchange for a certain premium, the two parties have entered into a contract. 

Although a contract of insurance may be oral, it is usually written in  the form of an insurance policy.

Insurance contracts, like all other contracts, must exhibit certain  

characteristics to be legally  enforceable.

 These characteristics are:

            competent parties

            legal purpose

        consideration  offer and acceptance (agreement) and


1-  Competent Parties


A contract is not valid unless it is made between two parties who are considered competent under the law. In most cases, a person who is a minor, insane, or under the influence of alcohol or drugs is considered incompetent.


     2-  Legal Purpose

The second requirement for a valid contract is that it be formed for a legal purpose. A contract that is against public policy (offensive to the best inter- ests of the public) or in violation of the law is not enforceable.


    3-    Offer and Acceptance

The third element of a valid contract, offer and acceptance, means that the contract involves two parties: one who makes an offer and one who accepts it. This is also called agreement. An offer is a promise that requires an act or another promise in exchange. Acceptance occurs when the other party agrees to the offer or does what was proposed in the offer.


The lastrequirement for a valid contractis that it involve consideration. Consideration is a thingof value exchanged for the performance promised in the contract. With insurance, the consideration thatthe insured givesis the premium payment. The consideration that the insurergives is the promise to pay forcertain losses suffered by the insured. 

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