What is a contract of insurance?

A contract of insurance is best defined as a formal agreement between two parties, typically the insurer and the insured. This contract outlines the terms and conditions under which the insurer agrees to provide coverage and the insured agrees to pay premiums in exchange for that coverage. The agreement specifies the types of risks covered, exclusions, and the claims process, making it a legally binding document.

In this context, the correct choice emphasizes that a contract of insurance is fundamentally a formal agreement rather than just a simple written document or a verbal agreement. Unlike options that mention just being "written" or "verbal," a contract of insurance must fulfill specific legal requirements to be enforceable, which include offer and acceptance, consideration (payment), and lawful purpose. Furthermore, the contract exists to establish rights and obligations for both parties, as opposed to merely affecting policyholders or being an informal communication.