What Is the Meaning of an Insurance Contract?

An insurance contract is a legal agreement that spells out the responsibilities of both the insurance company and the insured, as well as the specific conditions of coverage and the policy term and cost. Standard features of an insurance contract include the offer and the acceptance, consideration, legal capacity and purpose, and indemnification.

Insurance contracts are contracts of adhesion, which means they are offered on a "take it or leave it" basis. The insurance company draws up the contract, which only becomes mutually binding when the buyer makes an offer by accepting the terms or mailing in the first payment.

Consideration is the part of the insurance contract that defines how much the insured will pay in premiums for the coverage offered, and how the insurance company will reimburse the insured in the event of a loss. Consideration spells out the financial obligations of both parties.

In order to enter into an insurance contract, both parties must be legally capable of delivering what is promised. The insured must be of sound mind and of legal age, and the insurance provider must conform to any licensing requirements of the state in which the insurance is offered. Legal purpose means that the contract is invalid if it insures or encourages illegal activities.

Most insurance contracts operate on the principle of indemnity, which means the insurance company agrees to make the insured whole after a specified loss, but no more and no less. The principle of indemnity states an insured cannot profit from an insurance contract and the payout must closely equal the actual amount lost.