Understanding Insurance Contracts

Insurance is a contract of coverage between a policyholder and an underwriter.

In a recent article on understanding Risks in relation to insurance a definition of insurance was provided as an equitable exchange of risk from one party to another for a predetermined fee. The actual mechanism by which a risk is exchanged is the insurance policy, also known as the contract of insurance.

It is the insurance contract which governs all aspects of your coverage, including your rights and the insurance company’s rights for the duration of the policy. All insurance coverage contains a contract, and is based of the contractual obligations of the policyholder and the policy provider.

As such, it is important when looking to understand how insurance works, that we also examine the technical aspects of coverage, and how they may impact you.

What is a Contract?

A contract, in common parlance, is an agreement enforceable under law. This is to say, that a contract is a promise or commitment by one party in return for a promise of commitment from another party. However, it is not enough for two parties to simply come to a commitment; there must be some legal ramifications for enforcing the contact under law.

For example, a promise to purchase your children ice-cream if they eat their dinner would not have a legal outcome. While you would have broken your contract with your children in the event that they finish their dinner and you do not give them ice cream, this contract would be a social arrangement rather than a legal one – there is no expectation that legal action will be taken by breaking your promise.

A contract is different from an agreement in that it is legally enforceable. Although the agreement of the contract may be fairly intangible, and insurance policies are not, in themselves, “contracts” the policy is evidence that a contract for insurance does exist. Even if the physical insurance policy no longer exists, the contract of coverage being provided is still in operation.

If you held a Fire Insurance policy on your home, and your home was burned down causing the loss of your physical insurance policy, the insurer would not deny coverage because you are unable to provide your policy documents. The contract behind those documents is still in force.

Different Types of Contract

From social agreements, to legally binding ones, there are many different types of contracts.

Some contracts deal with simple and trivial matters, while others are far more complicated and important. Simple contracts could include things like taking the bus – you have a contract of carriage with the bus company having paid your, relatively modest, fare for a ride. A complicated contract could be an international corporate merger between companies with 1000’s of employees.

Generally, when we discuss contracts in Hong Kong, we normally focus on two major types:

Simple Contracts

The term “simple” is actual a bit of a misnomer here, as this contract type applies to matters which could be considered complicated. In this context, “simple” is used to define how the contract is formed and understood. A simple contract is one which does not need to be bound under seal – it can be a verbal or written agreement.

In actual fact, most insurance contracts in Hong Kong are Simple Contracts. In theory, a valid insurance contract does not need to be put down in writing. However, as this would confuse issues like car insurance tremendously, most insurance contracts in Hong Kong are normally accompanied by written evidence.

Contract by Deed

A deed is a formal document (also known as a written instrument) which is signed, sealed, and delivered. Contracts by deeds will normally be encountered in land and property transactions, which require a level of formality and provenance beyond a simple agreement.

Legal Aspects of an Insurance Contract

When looking at Insurance in Hong Kong there are generally 6 different areas that need to be understood:

Offer

Without an offer, no agreement can be made between two (or more) parties. For the purposes of insurance, the offeror (the party making the offer) could be either the insured or the insurance company.

When you submit an application form, or a proposal form, to the insurance company you are offering them the opportunity to exchange your risk. In this case you would be the offeror. If the insurance company amends the terms of coverage (perhaps you have a pre-existing condition that must be excluded under a health insurance plan), this would constitute a counter-offer and the insurance company would then be the offeror of the contract.

Acceptance

Unless the other party (offeree) accepts the offer being provided no contract can be made. Without acceptance there is no agreement – and consequently no contract. In order for the offer to be accepted all terms of the offer must be accepted prior to the conclusion of any contract.

If either party wishes to amend the agreement, this would constitute a counter offer which nullifies any previous agreement.

As previously stated, pre-existing conditions under a health insurance plan are a prime example of this offer/counter-offer situation. The original offer made by the applicant will impact the insurer’s underwriting based on their medical disclosures – which will require amending the terms of the insurance.

The original offer, or counter offer, must be acceptable by all parties involved in the contract.

Consideration

When dealing with contracts consideration is the price (whether monetary or another form of payment) being paid for the contract. We could also look at consideration as the promises being undertaken by the contract, and in the case of simple contracts (which is most of Hong Kong insurance) a promise must be given by both parties involved.

Under insurance the policyholder has the promise (or consideration) or paying their premium, while the insurance company has the promise (or consideration) of paying claims as dictated by the policy terms and conditions.

Capacity to Contract

This is a very important area, especially for insurance in Hong Kong. A party is only able to enter into a contract for which they have the interest or capacity to do so. This means that children and individuals with severe mental illnesses (including dementia or Alzheimers) are generally unable to enter into a contract of insurance, because they lack the legal ability to do so – they are incapacitated.

Intention of Legality

The final area which makes insurance contracts valid in Hong Kong is the intention for the contract to have legal outcomes. Although this is not normally a problem when it comes to insurance, as commercial agreements (purchasing coverage through an insurance business) in Hong Kong are always assumed to be created with the intention to have legal consequences.

Understanding Your Insurance Contract

Choosing to obtain an insurance policy is an important decision. You are opting to enter into a legal contract with very clearly defined terms and conditions. It is important that you fully understand the ramifications of your decisions, especially as you are creating a legal relationship with the entities you choose to contract your insurance through.

If you have any questions about Insurance in Hong Kong, or you would like to learn more about the technical aspects of your policy, please Contact an Expert Broker today.