Valid Contract

Published: | Updated: September 6, 2017

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.


How Well Do You Know Your Life Insurance?

The more you know about life insurance, the better prepared you are to find the best coverage for you.

Whether you're just starting to look into life insurance coverage or you've carried a policy for years, there's always something to learn.

Share this: