What is an essential characteristic of a contract of insurance?

A fundamental characteristic of a contract of insurance is that it involves a transfer of risk. In an insurance contract, the insured party pays a premium to the insurer in exchange for financial protection against specific losses or damages. This transfer of risk means that the insurer takes on the potential financial liability associated with certain risks, which provides peace of mind to the insured. This principle underlies the entire function of insurance, as it allows individuals and businesses to manage uncertainties and protect themselves from significant financial burdens.

While consideration is indeed a part of most contracts, insurance contracts specifically hinge on the concept of risk transfer, making it the defining feature of such agreements. Furthermore, while insurance contracts can be legally binding and can be made verbally, these aspects are secondary to the primary function of the contract, which is to mitigate risk through the pooling of resources. Thus, the transfer of risk stands out as the core element of insurance contracts.