Elements of a Contract of Insurance

What are the elements of a contract of insurance?

For a contract of insurance to exist, note the following:

(1) Subject matter. This refers to the thing insured against. In fire and in marine insurance, the subject matter or thing insured against is the property from fire. In the case of life, health, or accident insurance, the subject matter is the life or health of the person. In casualty insurance contracts, the subject matter is the risk of loss or liability of the insured.

(2) Cause or consideration. The cause or consideration for a contract of insurance is the insurance premium paid by the insured or assured. The amount of which is determined based on the probability of loss and extent of liability for which the insurance carrier may come into the assumption of risk or liability under the contract.


(3) Object and purpose. The principal object and purpose of insurance is the transfer and distribution of risk of loss, damage, or liability through the payment of premium by the insured to the insurance carrier or insurer under a legally binding contract.

For a contract of insurance to exist, these things must be present:

The insured has an interest which is susceptible of pecuniary estimation which is known as insurable interest;

The insured is subject to a risk of loss through the destruction or impairment of that interest by the happening of designated perils;

The insurer assumes the risk of loss;

Such assumption is part of a general scheme to distribute actual losses among a large group or substantial number of persons bearing somewhat similar risks; and

As consideration for the insurer’s promise, the insured makes a ratable contribution called a premium to a general insurance fund.