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HMRC internal manual

Insurance Premium Tax

Overview and the law: what constitutes a contract?

In order for an insurance contract to exist there must be a written or verbal contractual relationship. A dictionary definition of a contract is:

a legally binding agreement between two or more persons by which rights are acquired by one or more persons on exchange for acts or forbearance on the part of the other or others.

The essential elements of a valid contract are that:

  • the terms may be oral, in writing or implied by conduct (although in the case of some specific types of insurance, such as marine insurance, the contract must be in writing);
  • there must be an offer;
  • there must be acceptance and this must be unqualified and only open to the person to whom the offer was made;
  • there is a consideration;
  • the parties to the contract must intend to enter into a legal relationship and the subject matter of the contract must not be contrary to law;
  • parties must be capable of entering into a legally enforceable agreement, and their capacity must not be reduced for any reason (e.g.: minors, the mentally infirm, etc).