Insurance policies are legal contracts between the insurance company and the insured.
As with any contract, there must be three basic elements: An offer, acceptance and consideration. For insurance contracts the offer is actually originated by the prospect not the insurance company or agent. This offer is in the form of an application. Once the application is completed and payment is made, the insurance company then decides whether or not to accept the offer. The combination of the offer and the acceptance is known as the agreement. The consideration is the premium paid by the insured and the promise to pay a covered claim by the insurance company. This is commonly called a unilateral contract. Keep in mind, the contract must be for a legal purpose. You cannot buy a policy with the intent to kill the insured so you can collect the proceeds. Both parties of the contract must also be competent and understand the terms of the contract.
There are generally five parts to each contract:
A binder is a temporary insurance contract, oral or written, issued before a policy is written. For example, when you buy a new motorcycle your agent may tell you the motorcycle is covered immediately and for the next 60 days. This is know as a binder. It guarantees temporary coverage until a permanent policy can be issued. It does not guarantee that a permanent policy will be issued, but rather guarantees temporary coverage.
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