PERSONAL RISK CONCEPTS · 5 MIN READ

Legal Characteristics of Insurance Contracts

An insurance policy is a contract with a distinctive legal personality, and the exam tests each characteristic by name. It is aleatory: the values exchanged may be wildly unequal and depend on a chance event — a small premium can buy a very large claim payment, or nothing at all if no loss occurs. This contrasts with commutative contracts like a sale of goods, where the values exchanged are presumed roughly equal. It is unilateral: only the insurer makes an enforceable promise; the insured pays but promises nothing. It is conditional: the insurer's duty to perform depends on conditions such as premium payment, notice of loss, and cooperation. And it is a contract of adhesion: drafted entirely by the insurer on a take-it-or-leave-it basis, which is why courts apply contra proferentem — ambiguities are construed against the drafter, the insurer. Two further doctrines flow from the adhesion character. The doctrine of reasonable expectations, reflected in Restatement (Second) of Contracts Section 211, holds that ambiguous or surprising policy terms should be read according to the objectively reasonable expectations of the insured — in its strongest form, even where a careful reading of the fine print would have negated those expectations. Courts use it because mass-market personal lines forms are rarely read and never negotiated. The modern Restatement approach to interpretation adds that express policy terms govern, with implied terms supplementing gaps rather than overriding clear language. Finally, insurance is a contract of utmost good faith (uberrimae fidei). Both parties owe honesty above the ordinary commercial standard: the applicant must not misrepresent or conceal material facts, and material misrepresentation or concealment can allow the insurer to void coverage. On the insurer's side, modern law imposes a duty of good faith in claims handling — under the Restatement of the Law, Liability Insurance Section 13, an insurer evaluating a settlement demand within policy limits must give the insured's interests equal regard with its own, and a bad-faith refusal to settle can make the insurer liable for the full excess judgment above the policy limit.