Unique Features of Insurance Contracts

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by Christopher J. Boggs, CPCU, ARM, ALCM

Insurance contracts are similar to most other legal contracts; however, certain features of insurance contracts differentiate them from most other legal contracts. An insurance contract is:
Aleatory – The performance of one or both parties is contingent on the occurrence of an event that may never materialize. A homeowners’ insurance contract promises to pay if there is damage by fire, for instance; the insurance carrier doesn’t have to do anything unless the damage occurs.
A contract of Adhesion – Involves an unequal bargaining position. The insurance contract is offered to the insured on an “as is,” “take it or leave it” basis. The insured cannot negotiate the policy terms, they are written solely by the insurer. This insurance contract feature is why coverage is interpreted in its broadest sense and exclusions are to be narrowly applied. Any ambiguity is found in favor of the insured.
Unilateral – The promise of one party (the insurer) is given in exchange for the act of another party (the insured). The insured pays the premium and the insurance carrier promises to pay if a covered loss occurs (see Aleatory). If nothing happens, nothing is required of the insurance carrier – only one party (the insured) did anything (paid the premium).
One of Utmost Good Faith (Uberrima Fides) – Both parties to the insurance contract almost totally rely on the honesty of the other party. The insurer relies on the honesty of the insured in providing underwriting information; the insured relies on the honesty of the insurer that they will pay when a covered loss occurs.
Conditional – Before the insurance contract is activated, certain conditions must be met. There are two types of conditions: 1) conditions precedent; and 2) conditions subsequent. A condition precedent is a condition that must be fulfilled to activate the contract. In an insurance contract, the conditions precedent are the payment of the premium and a covered loss. Conditions subsequent are acts or duties that must be adhered to in order to receive the benefits of the policy. An example of conditions subsequent is the “Duties After a Loss” section of the policy. To receive the benefits of the policy, the insured must comply with the contractual requirements.


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Comments

  • December 2, 2008 at 6:41 pm
    Nearsighted Reader says:

    Was there a typo under “Contract of Adhesion” ?The policy is written by the insurer rather than by the insured.

  • December 2, 2008 at 7:28 pm
    Chris Boggs says:

    Hey, Nearsighted. Good catch.

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