Loss adjusters must interpret policy contracts in relation to each reported claim and make decisions on coverage. Therefore, a fundamental knowledge of contract law is essential to understanding the policy contracts you will come into contact with during your daily activities.
Civil law concerning the private rights of individuals falls into two systems: Common law, which is practiced in all provinces and territories except Quebec, and the Civil Code of Qubec.
Civil law in its application to the business of insurance is concerned mainly with the law of contract and the law of tort. In this article, we will focus on contract law.
Claims are adjudicated according to the terms and conditions of a contract–the insurance policy. Knowledge of contract law is not only useful to adjusters when analyzing policy coverages, but it also is helpful when assessing hold harmless agreements, lease agreements, releases and any other contracts. When the fundamental elements of contract law are not contained within an agreement, a legally enforceable contract does not exist. Contracts can be either written or oral; both are equally enforceable.
To be legally binding contracts must have five essential elements:
Bob Duncan had always dreamed of owning his own business. He was unsure what type of business he would open until the day that he saw an advertisement for a hot dog stand in the local newspaper. The asking price was $12,000, which was perfect for him, since he had already saved nearly $15,000 to put towards a new venture. Bob immediately called the number in the ad and spoke with Ed McLeod, the current owner of the Ed’s Superdogs Ltd., to set up a meeting for later that week. During the meeting, Bob negotiated with Ed to bring the price down to $11,000 and Ed agreed to sell the business to Bob for that price.
There must be an agreement between the parties.
When Bob decided to purchase the hot dog stand, he made a fair offer to purchase the business. When Ed accepted the terms of the offer, an agreement was reached. Bob wanted to buy the business and Ed wanted to sell it. Bob presented terms and conditions to Ed who agreed to them. The element of agreement was met.
Capacity to Contract
Parties must be legally able to enter into contracts.
Bob Duncan and Ed’s Superdogs Ltd. are legal entities and therefore legally able to enter into contracts. On the other hand, Bob Duncan and Ed’s Superdogs (not Limited) would not be able to enter into a contract because Ed’s Superdogs is not a legal entity.
One party must give consideration for the act or promise of another party.
Bob agreed to pay cash in exchange for the business and all of its property. The cash payment constitutes consideration.
In the case of an insurance contract, consideration is the premium the insured agrees to exchange for the promise of indemnity in the event a covered loss occurs. To make a contract binding there must be an exchange of promises. For example, when an insurance company agrees to pay the insured a certain sum of money in settlement of a claim under a homeowner’s policy it is fulfilling a policy obligation. If the insured were asked to sign a “release” it would not qualify as a contract. The insurance company is not providing anything for the insured’s waived right to sue. Rather, the insurance company is merely fulfilling the policy obligation already paid for by the insured. In some instances an insurance company may ask for such a “release” merely as acknowledgement from the party that the sum has been paid. If the insured did decide to sue, such a “release” would not be binding because the insured was legally obligated in contract to pay that sum of money to the insured. On the other hand, when a third party claimant is asked to sign a release in settlement of an injury suit, such a release would fulfill the criteria for a contract. The insurance company is providing a stipulated sum of money in exchange for the third party relinquishing a right to sue.
There must be intent among the parties to create a legally enforceable agreement.
Both Bob and Ed were clear on the terms and conditions of the agreement and genuinely intended to create a legally enforceable contract. The fundamental difference between a contract and a simple agreement is that contracts are enforceable by law. If one party defaults on obligations under a contract, the injured party has recourse to the courts. Both parties must have genuine intent to enter into an agreement that is legally enforceable. In the scenario, both Bob and Ed were in agreement to make the transaction happen and therefore the agreement was legally enforceable.
Legality of Object
The sale and purchase of the business were lawful.
A contract cannot be established for a purpose that violates a civil statute, criminal law or public policy. To insure someone against the effects of a fortuitous loss (for example a fire or a windstorm) is legal. A contract to commit a crime or to obstruct justice is an illegal purpose and would not be enforceable through the courts. In the scenario, transferring ownership of a legitimate business is legal and so, Bob’s purchase of the hot dog stand satisfies this final element of a legal contract.
Special requirements apply to the making of insurance contracts further to the generic rules applicable to contracts. The additional elements include the principle of indemnity, insurable interest and utmost good faith. Provincial insurance legislation and regulations in the common law provinces (the common law), and in Quebec (the Civil Code of Qubec) establish how the law affects insurance contracts. Although governed by contract law, insurance policies are subject to certain unique requirements that distinguish them from other types of contracts.
Policies are based on the principle of indemnity. In the event of a claim, the payment made represents the actual extent of damage. The insured should not benefit from any loss but, instead, should be returned to the same financial position they were in immediately prior to a loss.
An insurable interest exists where it can be established that the insured has a financial interest in preserving the property. In other words, the insured must have a financial relationship to the property to be insured. Ownership of the property qualifies it for insurable interest. Insurable interest also extends to a mortgagee, a lessee, a bailee, a consignee or anyone else who is in a position to suffer a financial loss if the property is damaged.
There is an implicit obligation to deal in good faith in any contractual relationship, but in insurance a tradition of utmost good faith demanding a higher standard of honesty and trust from both parties has evolved in the common law. It is an obligation not to do something, without reasonable justification, to counter the reasonable expectation of the other party in the exchange of promises. Utmost good faith in claims weighs heavily on insurers as the obligations created for claims handlers equate to consumer protection. The insurer must act in a balanced and reasonable manner. Provincial legislation mandating ethical standards for insurance dealings and public policy govern how utmost good faith will be judged.
Insurance companies and their loss adjusters must not act in ways that would unreasonably affect the resolution of a claim under a policy. Most insureds are in a weaker financial position than insurance companies and it creates an imbalance in the bargaining status of the parties. This vulnerability is heightened when a loss occurs. To deny a claim, delay payment, or to take advantage of the insured’s economic vulnerability by offering an inappropriately low settlement does not represent good faith. When an insurance company refuses to pay
a legitimate claim that it should know is valid, the conduct may be labelled as malicious, oppressive, and high-handed The law recognizes that the insurer is the more powerful contracting party, and would be looking to balance the power between the contracting parties.
Insurers are obliged to act fairly and preserve the contractual rights of the insured under the policy. The insurer owes a duty to be prompt in handling and assessing losses. As a result, loss adjusters have a duty to follow through on the contract and promise. Knowing your contract law is an important part of this obligation.