Legal purpose (insurance)
Legal purpose is a requirement for a valid insurance contract: the policy must be for a lawful objective and not against public policy. In insurance, this means the contract requires insurable interest and consent, and cannot reward illegal activity.
Legal purpose is one of the essential elements every valid contract must have, alongside agreement (offer and acceptance), consideration, and competent parties. A contract formed for an illegal objective or one that violates public policy is void and unenforceable from the start — and insurance contracts are no exception.
In insurance, legal purpose shows up concretely as the requirement of insurable interest: the policyowner must stand to suffer a genuine financial or emotional loss if the insured event occurs. Without it, a policy would simply be a wager on someone else's life or property, which public policy forbids. This is why you cannot buy a life insurance policy on a stranger, and why property insurance requires an ownership or financial stake in the property. Consent of the insured is likewise generally required for life insurance taken out by another person.
The doctrine also bars insurance from rewarding wrongdoing. A policy covering the proceeds of criminal activity, or one obtained with intent to murder the insured, has no legal purpose and is void. Note the distinction between a void contract (never valid at all) and a voidable one (valid until a party with the right to cancel does so).
State insurance licensing exams — including the health and life and health exams — test legal purpose as part of the four elements of a valid contract. Expect questions asking you to name the four elements, identify insurable interest as the expression of legal purpose in insurance, and distinguish void from voidable contracts.
Key takeaways
- Legal purpose means a contract's objective must be lawful and consistent with public policy, or the contract is void.
- The four elements of a valid contract are agreement, consideration, competent parties, and legal purpose.
- In insurance, legal purpose requires insurable interest — otherwise the policy is an illegal wager.
- Insurance licensing exams test legal purpose within the four contract elements and the void versus voidable distinction.