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A contract of adhesion is prepared by one of the parties (insurer) and accepted or rejected by the other party (insured). Insurance policies are not drawn up through negotiations, and an insured has little to say about its provisions. In other words, insurance contracts are offered on a take-it-or-leave-it basis by an insurer. Any ambiguities in the contract will be settled in favor of the insured.
As the name implies, a conditional contract requires that certain conditions must be met by the policyowner and the company in order for the contract to be executed, and before each party fulfills its obligations. For example, the insured must pay the premium and provide proof of loss in order for the insurer to cover a claim.
Insurance contracts are aleatory, which means there is an exchange of unequal amounts or values. The premium paid by the insured is small in relation to the amount that will be paid by the insurer in the event of loss.
John purchases a life insurance policy for $100,000. His monthly premium is $100. If John only had the policy for 2 months, which means he only paid $200 in premiums, and he unexpectedly died, his beneficiary will receive $100,000. A $200 contribution on the part of the insured in exchange for $100,000 benefit from the insurer illustrates an aleatory contract.
John purchases a homeowners insurance policy for $100,000. His monthly premium is $100. If John only had the policy for 2 months, which means he only paid $200 in premiums, and the home was unexpectedly destroyed by a covered peril, John will receive $100,000. A $200 contribution on the part of the insured in exchange for $100,000 benefit from the insurer illustrates an aleatory contract.
In a unilateral contract, only one of the parties to the contract is legally bound to do anything. The insured makes no legally binding promises. However, an insurer is legally bound to pay losses covered by a policy in force.
In general, an insurance contract is a personal contract because it is between the insurance company and an individual. Because the company has a right to decide with whom it will and will not do business, the insured cannot be changed to someone else without the written consent of the insurer, nor can the owner transfer the contract to another person without the insurer's approval. Life insurance is an exception to this rule: A policyowner can transfer (or assign) ownership to another person. However, the insurer must still be notified in writing.