An insurance policy is a legal contract that is agreed upon by two or more parties. The purpose of insurance is to indemnify you, or to bring you back to the same financial position you were in before you suffered the covered loss. Since insurance can have major financial implications, certain guidelines exist to make an insurance agreement valid.
Insurable Interest
You have a right to insure anything for which you have an insurable interest. An insurable interest exists when loss of the item being insured will cause a significant financial setback or hardship, or create a legal liability. For example, you might pay hundreds of thousands of dollars for your home, therefore the monetary investment in the home is an insurable interest to you.
Consideration
Each party to the insurance contract, typically you and the insurance company, must have considerations in the policy. This is what determines the value each party brings to the contract. For you, the consideration is the premiums paid throughout the contract term. For the insurance company, it is the potential money paid to you when you file a claim.
Legal Capacity
The insurance agreement must be made between two competent and legal parties. If you are a minor, or if someone else is legally responsible for your decisions due to a mental illness or restriction, you are not eligible to enter into an insurance contract by yourself. You do not have the legal capacity to make this agreement.
Meeting of the Minds
Sometimes called the doctrine of "utmost good faith," the meeting of the minds means that each party to the contract agrees to be honest with the other and gives personal attention to the details of the contract. In good faith you agree not to misrepresent material information to the insurer and it agrees not to unfairly cancel your contract as a result.
Offer And Acceptance
In order for the contract to be valid, you must make an offer to buy an insurance policy through a signed or electronic application accompanied by an appropriate premium, and the insurance company must accept your offer by issuing the policy. The contract is not valid without this step, even if the other factors exist.
