Contract Holder

What Is a Contract Holder?

A contract holder is an individual or organization owed a return on a contractual obligation. If all parties meet the terms of the contract, the contract holder receives the full benefits outlined in the contract. In broad terms, a contract holder owns a promise of a financial return on a specified date, usually in return for something of value.

Key Takeaways

  • A contract holder is the entity that is owed a payment in return for the fulfillment of the terms of a contract.
  • The term contract holder is most commonly applied to insurance contracts, but can also be used in other types of finance.
  • If the terms of the contract are not met, the contractor may lose some or all of the payment that they would otherwise receive.

Understanding a Contract Holder

A contract holder is the entity that is owed a payment in return for the fulfillment of the terms of a contract. Contract holders are commonplace in finance and can have different rights and compensation, depending on the sector in question.

Insurance

The term contract holder is most commonly applied to insurance contracts. In insurance, the policyholder is the contract holder. The insurance company promises to provide various financial benefits in return for a regular payment from the policyholder. The financial benefit may be a death benefit in a life insurance policy, partial payment of medical bills in a health insurance policy, or paid replacement in a property liability policy.

In some cases, the contract holder reserves the right to transfer the benefits in whole or in part to another party, such as when an employer provides benefits to members of a group insurance policy. An employee who receives health insurance as an employment benefit contributes to a group policy. However, in that case, the employer who purchases the group coverage from the insurer serves as the contract holder since the premiums and benefits technically flow through an employer’s human resources department.

In insurance, the contract holder's counterparty may also transfer or sell some of the responsibility for the contract to another party. The selling of policies to other entities is called reinsurance. Through this process, a company may spread the risk of underwriting policies by assigning them to other insurance companies.

The primary company, which originally wrote the policy, is the ceding company, while the second company, which assumes the risk, is the reinsurer. The reinsurer receives a prorated share of the premiums in exchange for either taking on a percentage of the claim losses or taking on losses above a specific amount.

Bank Loans

In lending, a bank issuing a mortgage becomes a contract holder, exchanging the cash necessary to purchase real estate in exchange for a collateralized loan. The contractual terms of the loan, such as the interest rate, payment schedule, and final repayment due date, describe the benefits owed to the contract holder. Banks often resell loan contracts on a secondary market, in which case the purchaser of the contract becomes the contract holder. 

Securities

In finance, the buyer of a security can be a contract holder. The buyer of a bond is contractually owed a specified payment on the principle and interest of the bond. Owners of stocks, options, warrants, and futures contracts are similar to the holders of insurance and loan contracts, except that they are entitled to some type of ownership share or the option or obligation to engage in a purchase or sale, rather than a specified amount of money.

Contract Holders and Misrepresentation

In the context of insurance, contract holders exchange premiums for contractually obligated benefits. Any individual or group that purchases insurance would be considered the contract holder.

The terms of a contract govern the conditions under which the contract holder receives benefits. If the contract holder breaks one or more provisions or terms of the contract agreement, they may forfeit some or all of their benefits. For example, a contract holder of an automobile insurance policy must abide by many provisions contained in the insurance policy to collect on claims

Policies typically give insurers recourse to deny claims if insured parties make substantive misrepresentations or conceal essential information when they apply for coverage. This practice is generally recognized in law under the legal concept of utmost good faith or uberrimae fidei. If an applicant for an automobile insurance policy failed to mention that they had a child of driving age living in the household, the insurance company could legally void their rights as a contract holder if the child got into an accident.

Insurance companies will void or limit benefits in cases of concealment or misrepresentation. Misrepresentation involves actively providing incorrect information to an insurance agent when purchasing a policy, while concealment technically consists of neglecting to provide information that would change the terms of the policy.

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  1. The Law Dictionary. "What is CONTRACT HOLDER?" Accessed Aug. 31, 2021.