PROPERTY PROVISIONS & CONTRACT LAW · 5 MIN READ

Contract Formation and Insurable Interest

An insurance policy is first and foremost a contract, so it must satisfy the classic formation elements: offer and acceptance, consideration, competent parties, and legal purpose. The application is the offer; the insurer accepts by issuing the policy or a binder. A contract insuring an illegal enterprise — a warehouse used exclusively to store narcotics — fails the legal-purpose element and is void ab initio, meaning it never existed at all. That is different from a voidable contract (formed with a minor, or induced by misrepresentation), which stands until the protected party elects to rescind. The Statute of Frauds adds a writing requirement for contracts that cannot be performed within one year: an oral agreement for a three-year policy is unenforceable, while short-term oral binders — typically capped at 60 to 90 days — are enforceable precisely because they fit inside the one-year window. Formation mechanics from general contract law also apply: under the mailbox rule an acceptance is effective on dispatch, silence is generally not acceptance, and a reply that changes terms is a counter-offer, not an acceptance. Insurance contracts then carry a set of special features the exam names repeatedly. They are aleatory (the exchange of values depends on an uncertain event, so a small premium can yield a large recovery), unilateral (after the premium is paid, only the insurer makes an enforceable promise), conditional (the insurer's duty is contingent on conditions like notice and proof of loss), personal (the contract follows the insured person, not the property, which is why pre-loss assignment requires consent), and contracts of adhesion (drafted entirely by the insurer, so ambiguities are construed against the drafter). Insurable interest is the doctrine that keeps property insurance an indemnity mechanism rather than a wager. In property insurance the interest must exist at the time of loss — a sharp contrast with life insurance, where it must exist at inception. Interests come in several forms and each has its own ceiling: an owner may insure full value; a secured creditor such as a mortgagee may insure only up to the outstanding loan balance, because that is the most it can lose; a bailee holding customers' goods has an insurable interest in the full value of the bailed property because it is legally answerable for it; and contingent interests, such as a lienholder's, are likewise insurable to the extent of the potential loss.