Legal Consideration

Reviewed by
Darrel Pendry
Updated: 11 March 2024

Legal consideration refers to the exchange of two or more things of value in a legally binding contract. Typically, money or currency is exchanged for some type of goods or services in these contracts. In order for any contract to be valid, it must have consideration.

In the case of insurance, legal consideration refers to the premiums paid, the funds paid to a third party and the protection against being sued. The exchange of these premiums is basically a promise of indemnity, whereas the third party then gives up a right to sue the insured. This means that each party to the contract must provide some value to the relationship for it to be binding.

If there is legal consideration and a contract has been executed, there are still a few things that can void consideration. For example, if a minor signs an insurance contract, the contract would not have legal consideration because minors are not legally allowed to enter into contractual agreements.

In addition, if the purpose of your contract is to encourage illegal activities, it is invalid. The exact legal considerations in every insurance contract can vary. It is up to the policyholder and the insurer to determine which legal considerations work for them.

In the insurance industry, an insurance policy is the evidence of a contract between an insured and an insurer. When a client submits an application and an insurer accepts it, the five basic requirements for a legal contract must be fulfilled. Here is an example of how legal consideration applies as one of the five requirements.

Let’s look at an example. Let’s say Jan and John are taking out a mortgage to purchase a home and the bank requires them to have fire insurance on the property. They submit an application to Fire Lines Insurance Ltd., who are agents of Fire Insurance Company Limited, the local company in their town; this constitutes an offer to purchase insurance from Fire Insurance Company Limited.

In their application, they disclose all the material facts about the property so that the underwriters may properly assess the risk. The insurance company may either accept or reject the application or accept it with certain conditions attached. The insurance companies underwriters review the application and find it a desirable risk and accept. An agreement is reached between the parties to the new insurance contract.

Jan and John will be required to pay a premium (a legal consideration) for the insurance. In exchange for the premium, the insurance company promises to indemnify (another legal consideration) them for damage set out in the policy. This would then meet the requirements of legal consideration and a policy is issued.

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