INSURANCE DOCUMENTATION

6.0. Introduction

Insurance documentation refers to those documents used in facilitating and/or evidencing insurance
transactions. The process begins at the point of creating public awareness and education of the product to
the conclusion of the insurance transaction and thereafter in the event of a claim. Throughout this process
various documents are used tat various stages to facilitate the process as listed and discussed hereunder:-

 Publicity
 Proposal forms
 Policy documents
 Endorsements
 Cover notes
 Certificates
 Renewal/invitation/notice
 Underwriting
 Claims
 Disputes
 Reinsurance.

6.1. Publicity

Publicity or advertising is one of the four major tools that insurers use to direct persuasive
communications to target buyers or public. It consists of non-personal or one-way form of
communication conducted t through paid medial under clear sponsorship. Advertising is the cost effective
way to disseminate messages which whether it is to build product preference for a company all over the
country or to motivate a developing nation’s potential consumers to buy a product/service. The role of
advertising is to shift the products demand curve upward. Insurers conduct their advertising in different
ways; n small companies, advertising is handled by the sales or marketing department, whereas large
insures set up their own advertising departments. However, these days, to a large extent advertising
program me, marketing managers must always start by identifying the target market and buyer motives.
Then they can proceed to make the five major decisions in developing an advertising program me known
as the five MS:-

 Mission – addresses the advertising objectives, which includes: to inform, persuade and remind.
 Money – budget allocation for advertising which is determined by:
 Stage in the product life cycle
 Market share and consumer base
 Competition
 Advertising frequency
 Product substitutability
 Message – What message should be sent. The message should have a theme and an appeal as
these expenses the major benefit that the product offers.
 Media – What media should be used. The media selected sho7uld be the most cost-effective to
deliver the desired number of exposures on audience awareness depends on the exposures reach,
frequency and impact.
 Measurements – how should the results be evaluated. Many companies try to measure the
communication effect of an advert (i.e. its potential effect on awareness, knowledge or
preference).

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6.2. The proposal Forms

A proposal form is an instrument used to gather details or information on the risk and subject matter of
insurance. The forms are provided directly by the insurer or through a broker/agent as the case maybe.
These contain relevant questions for each class of insurance; hence, each class of insurance has its own
proposal form. Answers to the risk specific questions will enable an underwriter to decide whether or not
to take the risk and if taking the risk, then on what terms, conditions and premiums. The proposer is
certain classes of insurance, surveys may be commissioned to obtain additional details about the risk
exposures being proposed for insurance, e.g. in case of industrial fire proposal.

6.2.2. The structure of a proposal

The answers to the question in a proposal form are the sought after information. This information is in
essence the material facts, which influence the insurer in deciding whether or not to accept the proposal
form thus forms the basis of an insurance contract and the insurer considers the proposal as the true
expression of the proper’s intentions regarding the contract and any variations to the same can only be
effected with the knowledge of the insurer.

6.2.2. The structure of a proposal form

In summary, the form contains:

 Particulars of the proposer – the name of the proposer, business address or contact address, ad
location. These details are essentially for particularization of the contract.
 Particulars of the risk – includes description of the trade, occupation or business practice, location
etc. These are for underwriting considerations.
 Insurance history and any past declinature – it helps to gauge both moral and morale hazards.
 Past claims history – the details here relate to the proposer’s past insurances and claims, which
helps to gauge both moral and morale hazards, and more importantly whether the proposer
qualifies for any no-claim discounts.
 Period of insurance required – is required to compute the premiums.
- The declaration – the declaration gives a positive affirmation that the information provided is
true to the best of the proposer’s knowledge and belief.
- Signature and date – the signature provides personal authentication of the proposal, binding
the proposer to the terms and conditions of the contract.

6.3. Policy Document

A policy document provides proof or evidence of existence of an insurance contract. Various classes of
insurance and insurers have their own policies. The policies vary in length and style in accordance to the
class of insurance. Most policy documents are styled as listed and discussed here below:-

 The heading
 The preamble
 The policy schedule
 Operative clause
 Exceptions
 The conditions
 Signature

6.3.1. The heading

This is the outset part of the policy document and incorporates the:

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  Name of the insurer
 Address of the insurer
 Company or insurer’s logo
 Insurer’s branch network and addresses.

6.3.2. The preamble

This is the forward or the introductory portion of a policy document, which states what, the policy is all
about. The wording of the preamble varies from policy to policy but basically the preamble captures the
following:

 The proposal form is stated as being the basis of the contract and incorporated therein, which
reveals out the importance of the information provided in the proposal form, which becomes
material facts in forming the contract.
 Premium Payment – a contract becomes valid when his premium has been paid by the proposer.
It states that premium has been paid or an agreement has been reached to have the premium paid
in future by insured.
 The insurer’s promise – undertakes to provide the insurance cover subject to policy terms and
conditions.

6.3.3 The policy schedule

This portion personalizes the contract by capturing all the personal information in the proposal form,
which includes:

 Name of the insured

 The address f the insured
 The nature of the business or profession
 The period of insurance
 Premiums calculations
 Sum insured
 The policy number
 Reference to any special limits, exclusions, terms and conditions

6.3.4. The operative clause

This provides quite clearly what the insurer will do by specifying the insurer’s liability , responsibility
and duty. The operative clause begins with the phrase “the company will …” and continues t state what
exactly the company will do.

6.3.5 The exceptions

An exception is a provision, which restricts or entirely eliminates coverage for specified hazards. We
have both particular and general exceptions in a policy. A particular exception only applies to a part of the
cover provided by the policy while a general exception applies to the whole of the policy.

The insured should understand and know what type of exception applied in their policy. Exceptions come
into play when the loss incurred has been caused by the excepted o4r excluded peril. To illustrate,
Kehancha Ltd has a retailer’s policy that covers loss or damage to the trade contents. This cover includes
stock, furniture and fittings in the shop premises. A particular exception that is included to this section is
exclusion of loss or damage to movable property in the open caused by wind, rain; hail stones, snow,
flood or dust. The general exception that applies to all sections of the policy is war risks, explosions, own

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spontaneous disintegration and nu clear contamination. Consequently if any loss in the retailer’s stock is
occasioned by an excepted peril, then the insurers will not be liable to make good the loss.

6.3.6 Conditions

Conditions are obligation to perform both parties to a contract on the agreed activities without prejudice.
They are set demands, which must be met by the insured. The conditions maybe express or implied.
Express conditions appear in various parts of the policy. Express conditions state that:

 The insured will company with all the term of the policy
 Insured will notify the insurer of any changes in the risk
 The procedure to report a claim, in terms of time period
 The effect of fraud, misrepresentation and concealment
 The insured shall take reasonable risk control measures to minimize the loss exposure
 There shall be arbitration for a claim amount and not liability for the claim itself
 A condition about contribution
 The insurer’s rights of policy cancellation and the procedure.

The implied conditions on the other hand are not printed in the policy. The implication is derived from the
basic or special doctrines of insurance e.g. utmost good faith, insurable interest and indemnity.

 Conditions precedent

These are conditions that have to be satisfied before the commencement of the contract. Implied
conditions are part of this category.

 Conditions subsequent

These are conditions that require compliance once the contract is in force, e.g. change of business name,
trade and or occupation.

 Conditions precedent to liability

For a genuine and valid claim these conditions must be complied with, e.g. prompt claim notification in
the prescribed procedure. However, there is a general insurance statement on claims that insure should not
refuse to pay a claim on the grounds that a breach of conditions was connected with the events of the loss.

6.3.7. Signature

This is put by an authorized official, representative or principal of the company. Its purpose is to
authenticate the contract. Normally it will be near the preamble ort under it.

6.4. Endorsement

An endorsement is a provision added to the insurance contract by which the scope of its coverage is
clarified, restricted, or enlarged. Certain endorsements such as those that extend the perils covered, maybe
long as the form and attached when the policy is issued. Other endorsements are brief additions added to
the contract after it goes into effect. One of the most common and important uses of endorsements is the
addition of other perils. Error may also be corrected by use of endorsements.

6.5. Cover notes

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The cover notes are equivalent to a certificate of insurance and normally issued while the policy
document is under preparation, thus, providing proof of cover. This applies normally in all non-life
insurances except motor. The notes simply states that the insurance is in force and gives brief details of
the cover such as:

 Period of cover
 Date and time of commencement
 Name and address of the insurer
 Nature of the business or trade
 Any special terms

Cover notes are temporally and are suspended once the policy and permanent certificate of insurance are
ready and issued. They automatically expire within 30 days. In life assurance once a proposer has sent his
proposal form to the assurer, he will receive a letter of acceptance, which is really a counter offer to the
proposer, which is accepted once premiums have paid and is equivalent to the cover notes.

6.6. Certificates

Where insurance is compulsory in law, for example in motor insurance (third party risk) Cap. 405 of the
Laws of Kenya, requires that a certificate be issued which proves that the policy is in force. The
regulations provide that:

 Where a policy relates to a specified vehicle and extends to cover the driving of other vehicles,
the insurers must insure a second certificate on the demand of the insured.

Insurers must keep records of certificates issued for an at least one year from the date of expiry.

In motor insurance there are important specific details that must appear on the face of a certificate of
insurance, namely;

 Name of policyholder
 Insurance commencing date and time
 Registration number of vehicle
 Limitations’ as to use
 Certificate number
 The insurer and his signature to authenticate the certificate.

6.7. Renewal-/Invitation-/Notice

This refers to the renewal of contracts for another period after expiry of the insurance term, usually 12
months. Normally there is no obligation on either party to renew but the insurer takes steps to secure the
business for another term. The insurer will thus issuers renewal papers to the insured, which take the form
of renewal notices. Such notices detail the expiry date and the renewal premium and are usually
dispatched within a reasonable time to allow the insured prepare for renewal. Should the insured intimate
willingness to renew by sending his premium to the insurer, he then receives a confirmation of renewal
together with relevant certificates, which may be appropriate to the form of insurance procured. Non-
payment of premiums implies that the contract is not to be renewed and it will therefore lapse on renewal
date.

During renewal, the notice contain a warning about the duty of disclosure. The insured is again under a
duty to disclose all material facts, irrespective of proposal form questions, as this is a new contract. Some
underwriting considerations leading to an amendment of renewal teems considered during renewal
includes:

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  No claims discount entitlement – a claim free year in motor means a reduction in their renewal
premium.
 Bad claims record – this may necessitate imposing terms such as;
a) Increased premium
b) Reduction in cover
c) Imposition of a policy excess
d) Imposition of restrictive warranties
 Age of insured – restrictions are placed on driving for drivers of advance age
 Sum insured - re-computation of sums insured to cater for depreciation and -/ or additional assets.

6.8. Underwriting

This is the selection and rating of risks, which are offered to an insured. In essence, the task of the
underwriter is to manage the pool (created through insurance) as effectively and profitably as he can.
Thus the roles of an underwriter may be said to be:

 To assess the risk which people bring to the pool.

 Decide whether to accept or not to accept the risk, or how much the risk to accept.
 Determine the terms, conditions and scope of cover to be offered
 Calculate a suitable premium base.

6.8.1. Physical Hazards

The Physical hazards include

 Marine Insurance
 Life Assurance
 Fire Insurance Accident Insurance

Underwriting remedies for bad physical hazards

They include the following

a) General
b) Extra Premium
c) Excess or franchise
d) Reduction of cover
e) Physical improvements
f) Reduction of cover
g) Suitable policy exclusions

6.8.2 Moral Hazards

This is a risk arising from the nature and behavior of human beings connected with the subject matter of
the insurance.

Adverse moral hazards and their remedies include.

 Fraud –go off cover

 Carelessness – apply excess or franchise
 Unreasonableness – refusal at renewal
 Trend of adverse events – adjust premium upwards or decline renewal
 Regular claimant – adjust premium upwards

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6.8.3. Underwriting Process

The underwriting process varies from one class of insurance to another and there are usually a variety of
sources of underwriting information, namely:

 The proposer/applicant – the applicant gives both written and oral information before entering
into the contract. The written information is captured in a proposal form.
 Agents – they provide insurers or underwriters with reports, opinions and recommendations about
the policyholder.
 The insurers – own inspection or claims department – insurers maintain their own assessors and
surveyors to provide underwriters with physical inspection reports on the properties of applicants.
Claims department gives up to date statistics of claims experience to help in renewals.
 Insurer’s bureaus/associations – these provide rating services or lists of undesirable insurance
applicants. The associations are used to standardize or formulate industry rates and underwriting
factors.
 Other external agencies – automobile agencies, doctors’ medical reports and disaster monitoring
bodies are used to provide valuable information at their disposal to underwriters.
 Personal Insurance - The main source is the proposal form, which is filled by the applicant. The
underwriting process is delegated to someone like a broker who has authority to issue policies up
to a certain monetary limit of the sum insured for underwriting purposes. This is actually
applicable in household insurance where there is little discrimination among those cases, which
are acceptable.
 Life Assurance – Here the risk is assessed only at inception of the contract. Due to the provision
of the cover for a long period underwriting involves looking at medical factors, occupational
factors, family health history, age and individual lifestyle factors. HIV/AIDS threat has
occasioned additional investigations and strict underwriting practices. In order to reach a
favourable decision an underwriter may require more additional information e.g. a report from the
proposer’s doctor on the proposer’s medical history, specific tests and/or medical examination
report from an appointed hospital/laboratory.
 Commercial Insurance - Commercial insurances require complicated and exhaustive information.
The size of the risk will determine the level of complexity of the underwriting process. The
underwriter will not only depend on the information provided in the proposal form by the
applicant but will also require services of other experts such as brokers and surveyors. The broker
is able to do site visits and prepare a report on the relevant aspects of the risk. The documentation
through extensive in content forms the basis of underwriting the risk. Become indispensable in
commercial insurance underwriting. There are various specialists in liability fire, security
engineering …etc, who prepare comprehensive reports on:
 The full description of the risk
 An assessment of the degree of risk. This assessment includes both physical and moral
hazards surrounding the property which may have an impact on the magnitude of the risk
e.g. in fire insurance.
 The estimated maximum loss
 What procedures in terms of safety and security should be taken to protect the insured
against the risk?
 Adequacy of the sum insured.
 Adequacy of the limit of indemnity

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6.8.4. Premium Determination

The underwriter has the duty to determine the premiums to be paid for any particular risk accommodated.
The premium, which an insured pays represent the insured’s contribution to the common pool. Premiums
must thus be fair and reflect the degree of hazardless, which the insured brings to the pool.

The factors considered in premiums determination include:

 Expected claims costs

 Operational expenses e.g. salaries, advertising, commission and other office costs.
 Costs relating to outstanding claims
 Costs relating to catastrophic risks
 Reserves
 Profit returns or margins
 Inflation
 Interest rates
 Exchange rates
 Market competition

6.8.5. Premium calculations

Premiums are calculated by applying a premium rate percentage or per mile to a premium base. The
premium rate captures the hazards and the premium base measures the exposure. Each class of insurance
has different bases upon which premium is determined. In fire insurance a base rate percentage is applied
to the sum insured. In public liability, a rate is applied on turnover while employers’ liability is often rated
on the wages paid. Those different bases reflect the different exposures and the rates indicate the
hazardless level. Premiums calculated may be adjustable or flat premiums. Insurance companies may
charge an adjustable premium e.g. in stock insurance due to its fluctuating nature while in the majority of
cases like motor insurance, a flat premiums is charged.

 Adjustable Premiums

There are certain cases where the exact amount of premium may not be known at the inception of the
policy, in which case an estimate is given. It is this estimated figure that shall be used as a guide to
compute the full premium payable in future. At the end of the policy year the actual figure is worked out
whereupon the initial premium is adjusted either up/down words to reflect the emerging reality. An
example may be in the Employer’s Liability cover, where wages may increase/ decrease during the
currency of the cover, besides making adjustments for new recruitment and/or retrenchments, sackings
…etc, thus, it becomes difficult to provide a precise limit of indemnity at inception of the policy. In stock
insurance for example the actual values of stock vary during the currency of the policy thus making it
difficult calculate the premium out of the sum insured at the beginning of the year. Hence insured’s are
advised to declare a monthly stock value any pay an estimated premium, which is then adjusted at the end
of the year when the actual value is established.

 Flat Premiums

Flat premiums are those premiums, which are paid at the beginning of the year and require no adjustments
at the end of the year. Iles, which in most cases the application of a rate to a premium base, does not exist.
This is practiced in motor insurance, unless the vehicle has a relatively high value to warrant adjustment.
The flat premium is got from the rating tables, which reflect the hazards, associated with the insured and
the vehicle. The underwriting factors to determine the premium are sourced through the proposal forms.

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Life Assurance premiums

Premiums in life assurance incorporate four aspects:

 Mortality – which entails the risk of death as given from the mortality tables
 Expenses – provides or operating expenses such as administrative, stationery, commissions and
other office costs,
 Investments – this takes care of the future income earnings from the invested amounts,
 Contingencies – this provides for the safety margin of unexpected level of losses.

6.9. Claims

Handlings claims is the most important aspect of the insurer’s advertising. A claim form is the means by
which claims are intimated. The insured may submit his claims personally or through a duly authorized
agent acting on his behalf such as solicitor or an insurance broker. Similarly different persons may act on
behalf of the insurer namely:-

 Insurers’ employees – claims department

 Loss adjusters –professional claims investigators/quantifiers
 Other agents –solicitors, brokers to agree settlement on their behalf.

6.9.1. Claims Procedure

Claims procedure involves three stages as listed and discussed here after:

 Claims notification
 Claims processing
 Claims settlement

Claims notification

Insurers need be notified of a claim as soon as possible as possible usually within a period of 48 hours.
This helps to investigate the claims while evidence is still fresh in the minds of persons involved and
witnesses can be found without difficulties. All events, which may give rise to a claim in due course, must
be communicated to the insurer. This is necessary since investigations may have to be made to verify the
loss, which may be prejudiced by delay, and chances of recovery from the negligent party are also
reduced if inquiries are not made within a reasonable dispatch. Nearly every insurance policy will require
the policyholder or his legal personal representative to notify the insurer of a possible claim within the
stipulated period. The Limitations Act broadly allows three years for submitting a claim involving death
or injury and six years for other claims. It is important to note that the above procedure relates to
generalize insurances. In life assurance, the procedure involves the use of courts because the life assured
may be dead and they the cause of the claim. It is essential to have the system in force for the insurer to
receive proper proof of death, proper legal identification of the recipient of any proceeds incorporating
any wills and assignments that may have been made.

 Claims processing

This is dealt by the claims department of the insurer. Insurers have to satisfy themselves that:

 Cover was in force at the time of the loss

 The policy covers the peril
 The insurer has taken reasonable been complied with by the insured
 steps to minimize the loss

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  Conditions have been complied with by the insured.
 No exceptions to the peril
 The value of the loss is reasonable

The duty of providing full particulars and proof of loss rest squarely upon the insured. He must prove to
the insurer that a loss has been caused by an insured peril. In practice, this may sometimes be difficult,
such as providing proof of burglary. However, all reputable insurers allow a liberal interpretation of what
constitutes proof, and unless there are reasons for suspecting the integrity of the insured, the insurer will
virtually pay all claims.

In essence, since the insurer is holding the insurance fund on behalf of all policyholders, any payments
therefore should be completely warranted. This requires careful investigations and reasonable proof both
of the insurer’s liability and of the amount involved. The services of a loss adjuster are necessary in
claims processing. From the onset to the conclusion of the claim, loss adjusters being professionals are
involved in preserving the interests of the insurer which include:

 Checking that the cover was in force.

 Adequacy of the cover at the time of loss
 Measures taken to minimize the extent of the loss
 Providing possible settlement amount
 Full description of the loss
 Application of averages if appropriate
 Steps of handling the claims

The insurer’s claims department officials in the hope of providing an equitable settlement then verify
these details.

 Claims settlement

The guiding principle in claims work is that there should be careful attention to detail and through
investigations, but when liability is established payment should been made forthwith. Ordinarily, any
uncalled for delay will only result into loss of goodwill and possible future loss of business. Thus, a
prompt and fair claim payment has greater advertising value to the insurer, which is what they always
strive for. The settlement amount depends on the following factors:

 Nature of the cover

 The adequacy of the cover and
 Conditions that may limit the amount payable

The amount payable in the event of a claim is not subject of negotiation at the time of claim, but will
normally depend on among others whether it’s a partial or total loss, where partial then the extent of the
damage / destruction, amount claimed and excesses applicable will all be taken into consideration.
Ordinarily, life assurance claims are more straight forward and clearer than general insurance claims.

6.9.2. Methods of settlement

 Cash – most suitable method of settling claims and for liability and life claims is the only
practicable method available.

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  Replacement – insurer replaces an article other than paying cash. This is usually applied in glass
claims, jewelers and furs.
 Repair – an adequate repair constitutes an indemnity. This settlement is particularly common in
motor vehicle claims.
 Reinstatement (provides “new for old”) – found in fire insurance and concerns the restoration of
premises (not necessarily on the same site) to their former condition.

6.10. Disputes settlement

Few claims give rise to disputes as to either the liability of the insurer to settle the claim or to the
amount of settlement or the speed of processing the claim.

Methods of dispute settlement

 Courts of law
 Arbitration
 Insurance Ombudsman Bureau

Disputes referred to courts of law are those where the insured disagrees with an insurer about whether a
claim is covered by policy and the liability of the insurer to pay. After casing the courts’ ruling will be
binding to both parties. Policies do carry an arbitration condition that specifies that disputes concerning
the amount payable and/or the liability under the policy should be referred to an arbitrator.

An arbitrator in an independent professional looks at the pros and cons of the case and makes a judgment.
An arbitrator’s judgment is not final and in case of disagreement the case shall be referred to the legal
courts for determination.

6.11. Claims reserves

These are accumulated funds, which enables insurance companies to sufficiently finance their claims as
they arise. Reserves are basically grouped into:

 Technical reserves
 Free reserves

Technical reserves

These are to cover outstanding liabilities to insured’s and are subdivided into those that apply to general
business (non –life) and life business. Technical reserves for non-life business are divided into six:

a) Unearned premium reserves – this is a segment of this year’s premium income that corresponds
to the policy year of the next accounting period.
b) Un-expired Risk Reserves – when there is an unexpected high claim and the unearned premium
reserve is inadequate to service the liabilities is used to increase the required reserve level.
c) Outstanding claims reserves – this is a reserve created for reported claims but unsettled during the
particular accounting period.
d) Incurred but not reported reserves- this reserve caters for those losses that have occurred during
particular accounting period but not reported.
e) Catastrophe reserves – the reserves are for exceptionally worse claims experience.
f) Claims Equalization reserves – these are reserves created when there is a better performance in
returns to provide for a bad year of performance.

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In life business, during the early years the actual risk isles than the premium paid. The excess premiums
are invested and accumulated a stable fund out of which future claims are paid. The invested amounts
earn interest and capital gains, which may profit the insurer.

 Free reserves

This is the second classification of claims reserves. The free reserves in non-life business are known as
shareholders funds. They are not for any specific liabilities and are used in expanding the company. Being
the capital base, part of it is retained to maintain solvency. The other part is for dividends to shareholders
and to finance contingencies. In life business the free reserves thus form the profit or the excess. Other
reserves for unexpected claims may be withdrawn from free reserves. The residual profit is then divided
between shareholders and policyholders.

6.12. Reinsurance

Reinsurance means ensuring against (by the insurer) of risk already insured. The main purpose of
reinsurance is to allow an insurer spread risks to as to protect the insurer from unexpected losses or
catastrophes. Most companies reinsurer for a number of reasons as reviewed below;

6.12.1. Reasons for reinsurance

 Spread risks- an insurer will with to relieve itself from the uncertainty of loss by spreading the
risk of loss the insurer will have security and peace of mind.
 Consolidation- reinsurance helps to avoid fluctuations in claim from year to year. An insurer’s
account shows assets and liabilities net of reinsurance judiciously arranged reinsurances can
therefore substantially affect the net financial position.
 Capacity – by purchasing reinsurance, the insurer can accept all sizes of risk in the knowledge
that it can reinsurer any part of the loss which it feels is too large.
 Catastrophe – the possibility of a complete catastrophe and /or many claims form one event such
as an earth-quake, tsunami …etc, can be protect against by special catastrophe agreements with
are insurer.
 Technical services – reinsurers have experience in dealing with the largest and most difficult
risks. They can provide information to insurers and often become involved in researching new
areas of the market on behalf of a number of other clients.

6.12.2. Reinsurance transactions

There are two main was of transacting reinsurance that is: facultative and treaty Facultative involves
the “ceding” of each risk individually to the reinsurer by the direct office and the reinsurer decides in
each case whether to accept the risk or not. The contract is optional to both the insurer and the
reinsurer. Each contract for reinsurance is assessed on its own merit. The reinsurer is under no e
obligation through the previous agreements to accept the risk.

Treaty is the most popular form, which involves an agreement between the direct office and reinsurer
that all risks within certain parameters will be ceded and insure reinsurer agrees to accept such risk
(i.e. the contract is obligatory to both parties).

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