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Chapter 3 Contract and agency 3/5

D4 Offer and acceptance in practice

Let us now bring together everything we have learnt so far about offer and acceptance and see how it
works in an insurance situation.
Example 3.3
Katie accepts the tenancy on a new apartment but is concerned about the risk of damage by fire or theft to her
personal possessions.

Katie gives ABC Insurance Company details of the risk to be insured. It responds by quoting a premium of US$200
which is an offer to Katie. She accepts the premium by notifying the insurer and the insurer is then ‘on risk’ (another
use of the term ‘risk’, which in this context means that there is now a contract with Katie and any losses covered by Chapter
the policy, which occur from that point onwards, will be met). 3

We shall now consider the essential element of consideration, which is also necessary to ensure that a
valid contract is formed.

E Consideration

Contracts must be supported by consideration to be valid. But what exactly is consideration? It was
defined in Currie v. Misa (1875) as:
Some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or
responsibility given, suffered or undertaken by the other.
Consideration may be described, simply, as each person’s side of the bargain which supports the
contract. The payment of money is a common form of consideration for one of the parties, although, as
we can see from the above definition, not the only form. Parties can exchange promises to perform
certain acts in the future or promise to do something in return for the act of another. Their promises and
actions are the consideration supporting the contract.

Question 3.2 Reference copy for CII Face to Face Training
Think of two examples of other forms of consideration.

Sample examination question 1
Jane offers to supply filing cabinets to Pam who accepts the offer. What further action is required in order that a
legally enforceable contract exists between them?
a. The terms of their agreement need to be written down. F
b. Another person needs to witness their agreement. F
c. The filing cabinets need to be delivered to Pam. F
d. Pam needs to agree to pay Jane for the filing cabinets. F

In insurance contracts, the insured person’s consideration is the payment of the first premium (or a
promise to pay the first premium) plus agreement to the conditions specified in the policy. The insurer’s
consideration depends on the contract. For example, under a contract of indemnity, the insurer gives a
consideration (promise) to indemnify the insured for his injury or damage to his property or for his
liability to injury or damage to third parties. In life assurance, the insurer promises the payment of a
death benefit according to the specific contract terms.

F Cancellation of insurance contracts

Once an insurance contract has been concluded it is expected to continue until the agreed expiry or
renewal date. Some insurances are designed for short periods – travel insurance, for example. Others
such as motor, fire or home insurance are renewable contracts that will continue, typically, for one year
and the insurer usually offers terms for renewal at the end of that period.
There are some situations in which either the insurer or the policyholder will wish to cancel cover during
the term of the policy; this will be governed by the terms and conditions of the policy.