Insurance Insight Series: The Contract of Insurance | Part 1

Whatever type of insurance your client is considering buying, there are a few things you need to be aware of as the broker. In part one of this two-part insurance insight series, we explore the steps to enter a contract of insurance and your role in each of these steps.

The fundamentals for entering a contract of insurance

The process of entering into a contract of insurance generally involves proposal, offer, acceptance and consideration. We discuss each of these steps for the formation of a contract of insurance in more detail below:

Proposal

Most insurers require an intending insured to complete an application/proposal form, which contains requests for information the insurer requires in order to consider whether it will insure the proposed risk. Depending on the responses in the application/proposal form or nature of the proposed risk, it may be necessary for the insurer to seek further information from the intending insured.

As the broker, you play an important role in supporting the intending insured to provide complete disclosure in application/proposal forms. Generally, application/proposal forms completed with relevant and accurate information allow underwriters to fast track consideration of and responses to requests for insurance.

Offer

After receiving and reviewing all necessary information provided by the intending insured through the proposal, the insurer will, subject to the proposed risk being within its underwriting guidelines and risk appetite, make an offer to the intending insured to cover the proposed risk. This includes giving the intending insured a quote that contains the policy wording (terms, conditions, limits and exclusions of cover), period of cover and premium upon which the insurer is willing to enter into the contract of insurance.

As the broker, you have an obligation to use reasonable care and skill in the performance of your duties. Accordingly, as part of discharging this duty, you play an important role at the offer stage by advising your client whether the insurer’s offer provides adequate cover for their risk compared to other market offerings.

Acceptance

An offer must be accepted to create a valid contract of insurance. Acceptance is a ‘meeting of the minds’ where the intending insured reviews the insurer’s offer and, if they are happy with it, informs the insurer that they agree to the terms of the offer. After the insured accepts the offer, the insurer generally prepares and provides the insured with a Certificate of Insurance or Policy Schedule showing the terms of the contract of insurance.

As the broker, you play an important role in the acceptance stage because you are generally instructed by your client to confirm acceptance of the insurer’s offer. Depending on your relationship with the insurer, acceptance can be communicated in a variety of ways including closing advice, bind instruction through a broker portal, or other verbal or written correspondence.

Consideration

In simple terms, this is the mutual exchange of promises. In the context of a contract of insurance, consideration refers to the insurer’s commitment to indemnify the insured for loss or damage (within the terms of cover) subject to the insured paying the premium (within the payment terms).

As the broker, you play an important role in consideration because you collect a premium from your client and remit it to the insurer within the payment terms. To ensure your client remains covered, you must remit the premium to the insurer within the payment terms otherwise the insurer may be permitted to cancel the contract of insurance resulting in your client no longer being covered.

Coming soon

Now that we have worked through the formation of the contract of insurance, stay tuned for part 2 of the insight series where we will explore some of the obligations that arise from the insurer and insured entering into a contract of insurance.

Insight Series | The Contract of Insurance Part 2