Definition - What does Valid Contract mean?
A valid contract, in the context of insurance, refers to a legally enforceable contract made between insurers and policyholders as well as between insurers and reinsurers. It involves the transfer of risk for a premium payment.
Insuranceopedia explains Valid Contract
For a contract to be valid, it must comprise the follow five elements:
- Offer and acceptable: One party must make a definite offer, and another party must accept the exact terms. In terms of insurance, an applicant makes an offer in applying for a policy, and the insurer accepts in issuing a policy.
- Consideration: An exchange of value is necessary for a valid contract. The offer (application) and payment of the initial premium (consideration) constitutes the beginnings of a binding contract.
- Legal intent: The insurance contract must not entail illegal activities. For instance, it cannot insure the risk of injury while the policyholder commits a crime.
- Competent parties: The parties involved must all be considered legally competent for there to be a valid contract. An applicant is assumed to be competent unless they are a minor, under the influence of drugs or alcohol, or mentally incompetent.
- Legal form: Valid contracts follow state laws and guidelines. Some may require a written contract for it to be binding.
A contract that lacks of one of these elements is not valid and therefore legally unenforceable.