The Products

• Author: Denis Boivin
• Pages: 27-50

A. INTRODUCTION

One thread unites all participants in the Canadian insurance industry:

the insurance contract. Whether one is an insurance provider, an insur-

ance consumer, or an intermediary, there is no escaping the contract.

At any point in time, millions of Canadians are involved in a contrac-

tual relationship with an insurer and millions benefit from an insur-

ance contract without being privy to the agreement. The insurance

contract is the origin of all rights, obligations, and principles recog-

nized in insurance law. With the exception of the contract of sale, it is

arguably the most common type of agreement found in the market-

place. The insurance contract is also one of the most distinctive of legal

instruments. In this chapter, the key elements of this distinctiveness

will be reviewed. First, the fundamental characteristics of an insurance

contract will be described. Secondly, details will be presented regarding

the many ways in which insurance contracts can be classified.

B. THE CHARACTERISTICS OF INSURANCE

Insurance law is a branch of the law of contracts. Generally speaking,

the principles learned in a first-year contracts course apply to insur-

ance contracts. However, classifying an agreement as insurance engen-

27

THE PRODUCTS

chapter 2

ders many consequences. Some principles of law apply only to insur-

ance agreements, while others are irrelevant to this type of contract.

Furthermore, insurance contracts are heavily regulated in comparison

to agreements pertaining to other commercial ventures. Freedom of

contract still exists in the industry, but it is strongly curtailed. Hence,

one must be able to recognize that a given contract relates to insurance.

An agreement can be described as insurance without really being one;

conversely, a contract can be described as something else when it is, in

fact, insurance. With respect to characterization, the substance of an

agreement is more important than its form. In this section, the main

characteristics of an insurance contract will be identified. These are the

features that help distinguish such a contract from other commercial

agreements. They are risk, indemnity, premium, mutual dependency,

and public nature.

1) Risk

a) Definition

Insurance performs one basic function: it transfers risks from one party

(the insured) to another party (the insurer). Risk lies at the very core

of insurance, whether it is automobile insurance, liability insurance, or

life insurance. Simply put, a risk is a fortuitous event — an event that

may or may not happen, the occurrence of which does not depend on

the will of the insured. Wear and tear are not fortuitous occurrences,

and neither is the deliberate destruction of property. These events

occur with predictable certainty. Thus, they are not insurable. Death is

different, because nobody knows when he or she will die. With respect

to death, time provides the required element of uncertainty.

b) Object and Peril

In insurance parlance, risks involve two distinct variables: the object of

the insurance contract and the insured peril. The magnitude of the risk

depends on the relationship between these two variables. The insured

object is the person or thing that is covered by the contract — that is,

the individual or property that must suffer a loss or damage in order for

the policy to apply. The insured peril is the cause of the loss or damage

— that is, the danger that must materialize in order for the policy to

apply. For example, in automobile insurance, the objects of the con-

tract include the vehicle and its contents, whereas the insured perils

include crashes, theft, vandalism, and fire. Some objects are excluded

from a typical motor vehicle policy, such as electronic accessories and

equipment in excess of fixed ceilings. Likewise, some perils are exclud-

28 Insurance Law