Why must an insurance contract have a legal purpose?

An insurance contract must have a legal purpose to ensure that the terms of the agreement do not conflict with public policy and the law. A contract that involves illegal activities or objectives cannot be enforced in a court of law and is considered void. This principle protects both the insurer and the insured by creating a framework for fair and lawful dealings.

For instance, if an insurance policy were to cover losses resulting from illegal acts, it would undermine the legal system and societal norms. Insurance contracts must align with ethical standards and legal regulations to maintain their validity and enforceability. By ensuring a legal purpose, the insurance industry upholds the integrity of its operations and protects consumers from engaging in contracts that could potentially lead to illegal activities or outcomes.

In contrast, while customer satisfaction is important, it does not serve as a foundational requirement of a contract. Profit maximization for insurers is certainly an objective but not a prerequisite for the legality of the contract. Similarly, while creating binding agreements is fundamental to contracts, the binding nature itself is contingent on the legality of the purpose behind the contract. Therefore, the necessity for a legal purpose is the critical criterion that upholds the validity of insurance contracts.