A contract where one party either accepts or rejects the terms

When an agent sells an insurance policy, he or she is selling a contract. A contract is an agreement enforceable by law. For any such agreement to be legally enforceable, it must meet the following minimum requirements:

• There must be an offer and an acceptance
• There must be consideration
• The parties to the contract must be competent
• Its purpose must be legal
• The contract must be in legal form

Offer and Acceptance

Offer and acceptanceThe process of two parties entering into a contract. is the process of two parties entering into a contract; an agreement is reached only after offer and acceptance between the contracting parties. If the party to whom the offer was made requests a change in terms, a counteroffer is made, which releases the first offerer from the terms of the original offer. In the making of insurance contracts, the buyer usually offers to buy and the insurer accepts or rejects the offer. When you call an insurance agent for insurance on your new automobile and the agent provides coverage, there is an offer to buy and the agent has accepted the offer on behalf of his or her company. As stated previously, this acceptance is called a binder. The offer may be verbal, as in this case, or it may be in the form of a written application. This process differs for life and health insurance.

Consideration

A contract also requires the exchange of consideration. ConsiderationThe price each party demands for agreeing to carry out his or her part of the contract. is the price each party demands for agreeing to carry out his or her part of the contract. The value of the consideration is usually unimportant, but lack of consideration will cause the contract to be regarded as a gift and therefore unenforceable. In many cases, insurance contracts stipulate that the consideration is both in the form of premium and certain conditions specified in the policy. Such conditions may include maintenance of a certain level of risk, timely notice of loss, and periodic reports to insurers of exposure values. Conditions will be explained in detail in parts III and IV of the text in the descriptions of insurance contracts. Consideration, therefore, does not necessarily imply dollars.

Competent Parties

Another essential element for a contract is that the parties to the contract must be competent partiesIndividuals of undiminished mental capacity., or of undiminished mental capacity. Most people are competent to contract, but there are exceptions. Mentally ill or intoxicated persons are not recognized as competent. Minors may enter into contracts, but such contracts may be voided (or terminated). Upon reaching majority (age eighteen in some states, age twenty-one in others), the young person may ratify or reject the contract. If ratified, the contract would then have the same status as one originally entered into by competent parties.

A minor who enters into an insurance contract, therefore, may void it during infancy or when he or she reaches majority. Ratification of a policy at the age of majority can be accomplished (by oral or written communication) either explicitly or implicitly (by continuing the policy). Some states have laws giving minors the power to enter into binding life insurance contracts on their own lives as young as age fourteen.

Legal Purpose

A contract must have a legal purposeNot be for the performance of an activity prohibited by law.—that is, it must not be for the performance of an activity prohibited by law. If it does not, enforcing the contract would be contrary to public policy. A contract by a government employee to sell secret information to an agent of an enemy country, for example, would not have a legal purpose and would be unenforceable. For the same reason, a contract of insurance to cover losses caused by the insured’s own arson would be illegal and contrary to public policy, and thus unenforceable.

Legal Form

Contracts may be either oral or written; they must, however, follow a specific legal formAppropriate language., or appropriate language. Legal form may vary from state to state. As noted, some insurance contracts are—at least initially—oral. Most states do not have laws directly prohibiting oral contracts of insurance. They do, however, require that some contract forms (the written version of standardized insurance policy provisions and attachments) be approved by the state before being offered for sale.

Moreover, the nature and general content of some policies are specified by law. Most states require that certain provisions be included in life and health insurance contracts. Thus, although some contracts may be oral, insurance contracts must—for the most part—be in writing, and they must conform to the requirements of the states in which they are sold.

Enforceable by law, a contract is a legally binding agreement made between two or more parties. If the parties argue about the validity of a contract, the case goes before the courts, which determine if there is a breach of contract. 

There are several vital pieces to a contract:

• Offer. The offer declares one of the parties will provide or do something. Most contracts include a precise time frame to complete the task. If the acceptance time expires, the offer is withdrawn.
• Acceptance. You can only accept the parts included in the contract. Before an agreement occurs, if there are any new terms to include, this is a counteroffer. You can accept in writing, verbally, or by inferring. 
• Intention of legal consequences. In a contract, all parties know they must abide by the contract, and the law can enforce the agreement. The contract doesn't need to state that you acknowledge the legality of it; however, if the parties don't agree that the contract is legally binding, the contract must state this fact.
• Consideration. For the contract to be binding, it must have valuable consideration. This means that one party must do something in exchange for a benefit of value, which is the consideration.
• Terms and conditions. If there's a dispute, the courts examine the terms and conditions in the contract.
• Breach of contract. This occurs if one of the parties doesn't fulfill the terms and conditions. The courts determine if the contract suffers a breach, and one party might receive damages.

Agreement Component of a Contract

An agreement component deals with offers and counteroffers, both of which are either verbal or written. The process deals with one party offering specific terms and conditions that the other party either accepts or rejects. 

If any terms or conditions change, then the offer turns into a counteroffer. Each party negotiates the terms and conditions until they agree. From there, both parties can draw up the contract.

Consideration Component of a Contract

The consideration component includes the obligations and conditions that state what each party must do. It also mentions the performance, payment terms, liabilities, and what happens if there's a breach of contract.

When Does a Contract Take Effect?

If there is no effective date listed in the contract, it becomes active when signed. If the person who signed it did not date the signature, the contract becomes active when the agreement leaves his or her hands.

However, if the contract includes an effective date, the contract becomes valid from the stated date, and not when the signatures are dated. For instance, if you sign the document today but the effective date is in a month, you must follow the agreement beginning today, even though you cannot act on it for a month.

How Long Does an Offer Stay Open?

Unless the contract includes an expiration date, the offer remains open for a reasonable amount of time. This time frame varies depending on the business and services offered. The best way to avoid confusion is to include an expiration date.

You should also accept the offer as soon as possible to make sure you take advantage of it. However, the other party, called the offeror, can revoke your offer.

Contract Enforcement 

If the court finds that a contract does exist, it can also determine enforcement. The court might not enforce the contract. If there's a defense to the contract, the court might find it voidable. This means one of the parties suffered from unfairness.

There are certain circumstances under which a court might refuse to enforce the contract.

• Capacity to contract. To remain bound by the contract, you must have a legal right to create a contract. This is called the capacity to contract. If you are unable to form the contract due to mental impairment or age, the contract might be invalid.
• Duress, misrepresentation, or undue influence. If anyone threatens, makes false statements, or coerces the other party, the contract is void.
• Unconscionability. This defense deals with the fairness involving the terms and process of the contract. If the contract's terms are harsh, the court might decide the contract is unconscionable.
• Public policy and illegality. The courts cannot enforce contracts that engage in illegal or immoral activity.
• Mistake. To cancel a contract due to a mistake, both parties must have committed the error. You cannot claim a mistake if you failed to read through the contract.

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