Special Features

What Does Special Features Mean?

Special features in an insurance contract are the unique details that distinguish it from other legally binding agreements. If these special features are violated, the insurance policy may be rendered void.

All insurance policies are legally binding contracts, meaning they must meet all five essential requirements of a legally enforceable contract:

1. Agreement: An offer must be made and accepted without the need for further negotiations.
2. Genuine Intentions: All parties must enter the contract willingly, without fraud, duress, concealment, or mistake, and must fully understand the terms.
3. Consideration: Each party must provide something of value. For insurance, the insurer promises to compensate for losses in exchange for a premium paid by the insured.
4. Legality of Object: The contract’s purpose must be lawful and not against public policy.
5. Legal Capacity: All parties involved must have the capacity to understand and fulfill the obligations outlined in the contract.

Beyond these five legal requirements, insurance contracts must also meet additional special elements to be legally enforceable.

Insuranceopedia Explains Special Features

Insurance contracts possess several distinctive features that set them apart from other types of agreements. Some of these features include:

1. Unilateral Creation: An insurance contract is typically written by the seller (the insurance company). Most contracts are drawn up by all parties involved, but in insurance, the insured can request specific coverages or, when the risk and premiums are significant, negotiate custom policies with underwriters. These custom policies, with unique wording, are referred to as manuscript policies.
2. Utmost Good Faith: An insurance contract operates on the principle of utmost good faith, meaning there is an implicit agreement between the seller and buyer that all relevant information must be disclosed. Violating this principle can result in the contract being voided. Practically, this means that any information provided by the insured in the application or submission to the underwriter must be 100% accurate. The underwriter uses this information to assess eligibility and calculate the premium, making its accuracy critical.
3. Conditional Obligation: The insurer’s obligation is conditional and only activated if and when an insured loss occurs. If the loss does not happen, the buyer receives no payout.
4. Indemnity: This feature is closely related to the previous one. The indemnity clause in an insurance contract defines the amount the insured is entitled to receive and how it is calculated when a loss occurs. The indemnity is typically equal to the actual amount of the loss, considering factors like loss of use or business interruption. The purpose is not to allow the insured to profit from a loss, but rather to restore the insured to the same financial position they would have been in had the loss not occurred.
5. Insurable Interest: Only those with a financial interest in the object or event being insured can benefit from the policy. This means a person cannot purchase insurance on an item they would not suffer financially from losing. For example, someone cannot insure their neighbor’s house and claim a payout if it burns down because they have no financial connection to it. However, a mortgage lender could purchase an insurance policy or be added as an additional insured on the owner’s policy, as they have a financial stake in the home.