Contract: an agreement enforceable at law

An insurance policy is a special kind of contract. To be extremely specific, it is an informal, aleatory, unilateral contract of adhesion to pay a stated sum subject to a condition precedent. This means, of course, that an insurance policy is not a formal, commutative, bilateral, negotiated, indemnitory, unconditional contract with right of subrogation. To understand what all these terms mean, a short course in contract law is necessary.

Many promises can be broken without penalty. But a contract creates a binding promise for which the law creates a duty of performance. This duty is imposed on the one who makes the promise, who is known as the promisor. The person to whom the promise is made is known as the promisee. Pursuant to a life insurance contract, the insurance company promises to pay a death benefit if the policyowner pays the premium. Since only the insurer makes a promise, it is the promisor. The policyowner is the promisee. To enforce that duty, the law provides a remedy to the promisee. If the promisor fails to perform as agreed in the contract, the promisee has two alternatives. He or she may sue for money damages on the contract. This is an action at law. Or if money damages are insufficient, the promisee may sue to require the promisor to fulfill its obligation under the contract. This is known as an equitable action.

In order for a contract to exist, the parties must fulfill certain requirements, which may change depending on the type of contract being created. For all contracts, however, three elements must exist: (1) a valid offer, (2) an acceptance of that specific offer, and (3) an exchange of consideration. There must also be a legal purpose for the contract, and the parties to the agreement must be legally competent.

For purposes of determining whether there has been an offer and an acceptance of that offer, it used to be said that for a contract to exist there must be evidence of a "meeting of the minds" between the parties involved. Since it is difficult for anyone (even judges) to read minds, this concept is no longer used. It is more precise to say that an agreement exists when there has been a "manifestation of mutual assent." This new standard merely requires an examination of the available evidence to determine whether each party had indicated an acceptance of the agreement.