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Introduction

So far, we have considered the nature of insurance and the operation of the insurance market. Now we
can start to deal with the legal principles that apply to insurance. In this chapter we look at contract law
and in subsequent chapters we examine the special legal principles that apply to insurance contracts.
The legal aspects of insurance are considered in relation to English law which comes from legislation (UK
Acts of Parliament and statutory instruments), judicial precedent (court decisions in previous cases),
custom and EU law.
Much of English law has developed from cases being heard in courts and the judgment given, based
3 upon the facts of the case. Generally speaking, once a principle has been established, it is followed in
Chapter other court cases where similar circumstances apply. This is what we mean by the term judicial

precedent. In the following sections, where case law has contributed to the establishment of legal
principle, we will refer to the case and a give a brief summary of it.
You will see references to claimants and defendants whenever we give details of legal cases. The
claimant is the party who brings an action in court against the defendant.

Key terms
This chapter introduces the following terms and concepts:
Agency Cancellation Capacity to contract Consideration
Contract law Fraudulent claims Insurer-intermediary best Offer and acceptance
practice
Valid contracts Voidable contracts

A Contract law

A contract may be defined as: Reference copy for CII Face to Face Training
an agreement, enforceable by law, between two or more persons to do, or abstain from doing, some act or
acts, their intention being to create legal relations and not merely to exchange mutual promises.
English Law, Smith and Keenan.
Applying this definition to insurance, it may be said that an insurance contract is an agreement,
An agreement,
enforceable by law, enforceable by law, between insurer and insured. The policyholder agrees to pay a premium to the
between insurer and insurer and abide by the terms and conditions of the policy. In return, the insurer agrees to pay to the
insured
policyholder a sum of money or something of monetary value, on the happening of a specified event.
How do both parties enter into this legally binding agreement and what conditions must be satisfied by
both parties to ensure that the contract is a valid one?
First, let us look at the essentials of a valid contract and then at the way in which an insurance contract
differs from other commercial contracts.

A1 Essentials of a valid contract

To ensure that a valid and enforceable contract is formed an agreement must satisfy certain criteria. We
will look at four of these in greater detail in this chapter. They are:
• intention to create legal relations;
• capacity to contract;
• offer and acceptance; and
• consideration.

There are other important elements to a valid contract – listed here for completeness:
• consensus ad idem (genuine meeting of minds);
• legality of purpose;
• possibility of performance; and
• certainty of terms.