Why Terms and conditions in an insurance policy are necessary?

     

Often the insurance policies are criticized for the detailed terms and conditions it carries as opaque or technical wordings which are not understood by common people. No doubt the simple wording of a contract is always a desirable feature for any contract and the industry is consciously working to make it as simple as possible but many a times the criticism is unfair. For example, If you pick up any document hard or soft copy or OS update in any industry, which has an agreement or a contract, offer, free offer, software update or any sale purchase proposition you will always find the word terms and conditions apply in fine print. Most of the purchase or download will not take place unless you agree to the terms of the agreement which run into thousands of words which no one wants to read.

The same is position in insurance policy also. In insurance, the insurance policy is a contract between the insurer and the policyholder, which determines the claims which the insurer is legally required to pay. In exchange for a consideration known as the premium, the insurer promises to pay for loss caused by perils covered under the policy.

No company can cover an unlimited amount of risk. It is not financially advisable. Based on the available data about probability of loss its frequency and severity it determines a fair amount of premium by homogenizing the risk category and class. And when it charges a fixed amount of premium it also needs to fix  a boundary within which the contract operates. The law of numbers decides the scope of cover, amount of premium and terms of contract. Any insurance company has limited capacity to cover the risk and has to be fair to all the other policyholders who have contributed to the premium pool. If there are no terms and conditions the cover will become open ended and unlimited which will be unfair to investors and other members of the society who contribute the capital to share the risk.

The terms and conditions are decided by experienced underwriters in a fair manner and are mostly standardized. Insurance contracts are generally considered contracts of adhesion because the insurer draws up the contract and the insured has little or no ability to make material changes to it. This is interpreted to mean that the insurer bears the burden if there is any vagueness in any terms, conditions of the contract. The principle known as contra proferentem prevails which means that any ambiguity should be construed against the drafter of the contract

Insurance contracts are governed by the principle of utmost good faith (uberrima fides), which requires both parties of the insurance contract to deal in good faith and in particular, imparts on the insured a duty to disclose all material facts that relate to the risk to be covered. Therefore it is necessary that every policy will have terms and conditions governing the contract though the need for simplifying the wordings for common policies is appreciated by the industry and while launching new products the efforts are made to make it simple.