United States
Hong KongThe four elements of a contract
Four: offer and acceptance, consideration, competent parties and legal purpose. In an insurance sale the applicant makes the offer and the insurer accepts by issuing the policy. Consideration is the application and first premium on one side and the promise to pay on the other.
General contract law arrives in this exam for one reason: an insurance policy is a contract, and several later provisions only make sense if you know which party did what. Who made the offer decides who can withdraw it. Who gave consideration decides what the entire contract clause is talking about.
The four, applied to an insurance sale
| Element | In general | In an insurance sale |
|---|---|---|
| Offer and acceptance | One party proposes, the other agrees | The applicant offers by applying with premium; the insurer accepts by issuing the policy as applied for |
| Consideration | Each side gives something of value | The application and the first premium, against the insurer's promise to pay |
| Competent parties | Both must have capacity | Of legal age, mentally competent, not under the influence |
| Legal purpose | The object must be lawful | An insurable interest and no wagering on a life |
The first row is the one the exam pushes on. The agent does not make an offer, whatever the sales conversation felt like. The applicant does, and the insurer's issue of the policy is the acceptance. That matters because it explains the counteroffer case.
The counteroffer, and why it is examinable
If the insurer issues a policy other than as applied for, rated, or with a rider or exclusion the applicant did not ask for, it has not accepted the offer. It has made a counteroffer. The applicant then accepts by paying the premium and taking delivery, or declines by doing nothing.
Ordinary contract law, and it is the analytical basis of the whole delivery process. A stem describing a rated policy handed over at delivery is asking who is now offering what.
Competent parties, in practice
- A minor generally lacks capacity to contract, which is why juvenile policies are applied for and owned by an adult.
- Mental incompetence at the time of contracting undermines capacity.
- Intoxication at the point of sale can too, which is a real and unglamorous reason agents do not write business in bars.
Legal purpose, and the insurable interest link
A policy on the life of a stranger has no lawful object. It is a wager, and wagers on a life are void. So insurable interest is not just an underwriting rule, it is the element of legal purpose applied to life insurance. That connection is worth holding because the outline lists insurable interest under contract law in section IX and under underwriting in section III, and it is the same idea in both places.
An applicant applies for a standard policy with the first premium. The insurer issues the policy with a rating for a health condition. In contract terms, what has happened?
- The insurer accepted the offer with a modification
- The insurer made a counteroffer, which the applicant may accept or decline
- The contract is void for lack of agreement
- The applicant is bound because the premium was paid
Where it sits on the paper
- Section III
- Contract law, heading D, in a section worth 12 questions
- Section IX
- Contract law, heading H, in a section worth 8 questions
- Sub-items in each
- Elements of a contract, and the unique aspects of an insurance contract
- Section IX adds
- Insurable interest, and warranties and representations
Contract law is one of the few topics the outline lists under both application sections, in nearly identical words. Section IX's version is slightly wider, folding in insurable interest and the warranties and representations pair. That repetition is the outline telling you where the questions come from.
The opinion, and the concession
Do not learn the four elements as a list to recite. Learn who does what in an insurance sale, because that is the only form in which the exam asks. Every candidate can name consideration. Fewer can say which side gives which consideration, and that is the question.
The concession: real contract law is more complicated than four bullets, and Texas has its own body of law on the formation and construction of insurance contracts that sits well outside the Insurance Code chapters we hold. This page describes the framework the outline sets out. It is not legal advice and it would not survive contact with a genuine coverage dispute.
Common questions
Who makes the offer in an insurance contract?
The applicant, by submitting the application with the initial premium. The insurer accepts by issuing the policy as applied for. If it issues on different terms, it has made a counteroffer, and the applicant accepts by paying any additional premium and taking delivery.
What is consideration in an insurance contract?
What each side gives. The applicant gives the statements in the application and the premium. The insurer gives its promise to pay benefits on the terms of the policy. The consideration clause in the policy states this, and it is one of the listed provisions in section II.
Why can a minor not own a policy?
Capacity. Competent parties is one of the four elements, and a minor generally lacks the capacity to contract. That is why a juvenile policy is applied for and owned by an adult, and it is also why naming a minor as beneficiary creates practical problems at claim time.
How does insurable interest relate to legal purpose?
A policy on a stranger's life has no lawful object because it is a wager on a death. Insurable interest is the element of legal purpose applied to life insurance, which is why the outline lists it under contract law in one section and under underwriting in another.