Insurance has been defined in many ways. One of the more popular definitions is that insurance is the substitution of a small, certain loss for a large, uncertain loss. Although this undoubtedly is true, it is not a very precise definition.
From a legal viewpoint, insurance contracts have been defined as follows: “Any contract by which one of the parties for a valuable consideration, known as a premium, assumes a risk of loss or liability that rests upon the other, pursuant to a plan for the distribution of such risk is a contract of insurance, whatever the form it takes or the name it bears.”
Many contracts which seem on their faces to be in the nature of contracts of insurance are seen clearly to fall short of the mark when examined in the light of this definition.
Fortunately, the best life insurance policies are in a form prescribed by statute or state regulatory authority, or are of such nature as obviously to be contracts of insurance. There are, however, occasional borderline cases to complicate the picture. The question whether a given contract is one of insurance is not always an academic question.
It is important because insurance contracts are subject to different portions of the common and statutory law than are ordinary contracts. Furthermore, it is important for the contracting parties to be able to distinguish contracts of insurance. Corporations do business under charters that set the limits of their activities.
Although some large corporations have succeeded in securing charters with powers so broad that they may legally engage in any activity except the coining of money, most corporations are not permitted to engage in the life insurance business. Such activities, in violation of charter grants, are said to be ultra vires.
A Philadelphia newspaper fell afoul of this legal distinction between permitted and prohibited acts of corporations. It advertised that if anyone were killed with a copy of that newspaper on his person, his heirs would receive a certain amount of money from the publishing company.
A test case was brought before a court, and it was decided that this was a contract of insurance and that the offering of insurance was an ultra vires act. Rather than try to get a charter as a life insurance company, the newspaper discontinued the offer.
Some years ago a group of ambitious young men living in Alabama formed an association of bachelors. Each paid an entry fee and promised not to marry for at least two years. At the end of the 2-year period the member not only was free to marry but also was to be given $1,000 in cash.
A suit was brought, perhaps instigated by an association of southern womanhood. The court decided that this was not insurance but was a gambling contract in restraint of marriage and hence illegal.
The question often arises as to whether or not fidelity and surety bonding should be considered insurance. Although persons engaged in the business will argue indefinitely that surety bonding is not insurance, for legal purposes, corporate suretyship is considered a branch of insurance. If an individual becomes a personal surety for another, he is not, of course, deemed to have engaged in the insurance business.
If, on the other hand, a corporation engages regularly in the surety bonding business and issues term life insurance rates in exchange for premiums, such contracts are considered to be contracts of insurance.
Contingent service contracts frequently are confused with contracts of insurance. It is said that, in China, doctors are paid to keep their patients well. The doctor is paid a regular fee so long as the patients remain well, but he receives no payment should one fall sick. Whatever the rule of Chinese jurisprudence may be, American courts do not consider that these transactions constitute contracts of insurance.
Likewise, the retainer fee charged by the lawyer or the annual service contract on a television set is not considered contracts of insurance. Although the insurance contract has some peculiar features, to be discussed later, it must conform also to the general form and conditions laid down by law for any type of contract.
Agreement consists of an offer being made by one party and its acceptance by the second party. In insurance of all kinds the principal type of offer is that made by the prospect when he submits an application for insurance. Even though an agent has actively solicited the business, it is firmly established that such solicitation does not constitute an offer. It is, rather, an invitation for the prospect to make an offer.
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