Contract Formation

• Author: Denis Boivin
• Pages: 170-186

170

A. INTRODUCTION

In Chapters 4 and 5, we examined the substantive requirements for the

creation of an insurance contract. As noted, the main conditions are an

insurable interest in the object of the contract and disclosure of all

material circumstances with respect to the risk. In Chapter 2, the main

characteristics of an insurance contract were identified: the concept of

risk, the principle of indemnity, the premium, mutual dependency, and

the public nature of the agreement. In this chapter, we will focus on

procedural matters concerning the creation of an insurance contract.

Assuming that all the substantive ingredients are present, how does

one create a binding insurance agreement? In this respect, what are the

roles played by the insurance provider, the insurance consumer, and

the intermediary? What is the difference between an insurance con-

tract and a policy? When does the agreement come into force and when

does it end? How does one renew or terminate the agreement?

The principles of law applicable to contracts generally are used by

Canadian courts and litigants in resolving disputes over the formation

of insurance contracts. This chapter will outline these principles and

highlight some important nuances specific to the field of insurance law.

CONTRACT

FORMATION

chapter 7

B. ESTABLISHING AN INSURANCE

AGREEMENT

1) Essential Ingredients

An insurance contract is formed once the parties agree on the essential

ingredients of the contract. As noted by E.R.H. Ivamy, these ingredients

are (1) the insured peril, (2) the insured object, (3) the length of the

contract, and (4) the premium.1The will of the insurer and the insured

must be ad idem on each point. Indeed, uncertainty with respect to any

one of these elements prevents the agreement from coming into effect,

even if the substantive conditions discussed in earlier chapters are met.

Davidson v. Global General Insurance Co. provides a classic illustra-

tion.2In Davidson, the parties had not agreed on the premiums or the

duration of the contract; they were still negotiating these points at the

time of the loss. The insured had received a letter from an insurance

agent that proposed a premium and stated that, pending the issuance

of the policy, “this letter [was] evidence that coverage as outlined [was]

in force.”3The insured felt that the premium quoted was too high but

did nothing to follow up with this insurer (insurer A). Instead, the

insured purchased insurance elsewhere. The second insurer (insurer B)

was clearly liable for the insured’s losses. Yet B argued that the insured

had coverage elsewhere and sought a contribution from insurer A.4The

court rejected this request. According to the court, the letter from A

was only an offer to conduct business. Notwithstanding the language

used by A, the letter was not an acceptance on the part of the insurer.

If this result appears unusual, ask yourself the following questions.

Assume that nothing happened for six months — no accident and no

response from the insured to the letter received in the mail. Could

insurer A sue the insured for arrears with respect to the premium quot-

ed in the letter? Of course not. So why should the insurer be liable in

this case?

Contract Formation 171

1 E.R.H. Ivamy, General Principles of Insurance Law, 4th ed. (London: Butter-

worths, 1979) at 97–101.

2 [1965] 1 O.R. 505 ( H.C.) [Davidson].

3Ibid. at 507.

4 With respect to the right of contribution, see Chapter 12.