Distinguishing Characteristics Of Life And Health Insurance Contracts

While life and health insurance contracts must meet the same tests that any contract must meet to be enforceable, they possess certain characteristics which are distinct from most other contracts. 

Aleatory 

Unlike commutative agreements in which the benefits exchanged are relatively equal, the insurance contract, like the gambling contract, is one in which one party can gain a great deal more than the other. In an aleatory contract there is no mutual exchange of equivalent monetary values. Rather there is an exchange of a certain amount on the part of the policyholder for an uncertain amount (at least in any given policy year) from the insurance company. Aleatory contracts are those in which the obligation of at least one of the parties to perform is dependent upon chance. Since the insured may recover more than he has paid in, it is important to create safeguards to prevent insureds from tampering with the laws of chance, such as intentionally causing a loss. 

Unilateral 

A unilateral contract can be enforced only against one party to the contract. In the insurance contract only the insurer makes a legally enforceable promise. The insured generally cannot be held liable for breach of contract if he does not pay premiums, since he makes no such promise. Payment of premiums merely continues the promise of the insurer. As long as the policyholder meets all policy conditions, the insurance company must fulfill its part of the agreement. Since premium payment cannot be required, failure to pay premiums is the only accepted reason for cancellation of the life insurance policy after the two years during which the policy can be contested. 

Contract of Adhesion 

Unlike most contracts, there is no bargaining in the preparation of the insurance contract. The insurance company prepares all of the details of the contract. The policyholder does not participate in the drawing up of clauses or the determination of the wording used. When an individual applies for insurance, he either must accept the policy as drafted by the insurer or reject it