3 Unique Consumer Protections in Life Insurance Contracts

The life insurance policy is highly consumer protection oriented and unique in the law of contracts. In legal parlance, it is an “aleatory, unilateral contract of adhesion.” Aleatory means that the insurer’s promise to pay the policy proceeds is conditioned upon an uncertain event (i.e., the insured’s death within the term of the contract).

Unilateral describes the fact that the insurance company is the only party to the contract which makes a legally enforceable promise. (The policyowner’s payment of premiums is technically a “condition precedent” to the insurer’s liability.) The insurer promises to pay a specific dollar amount if the insured dies while the policy is in force.

Note that the policyowner makes no promise to continue paying premiums and there is no way the insurer can require the policyowner to continue paying premiums. Adhesion is a legal recognition that the policyowner was not in a position to negotiate with the insurer on the terms of the contract and the resulting document is not evidence of the normal “give and take” negotiation and bargaining found in a standard contract. The insured may adhere to the terms of the policy but cannot change them. Furthermore, the legal terms of the life insurance contract and underlying mathematical assumptions make it difficult for the policyowner to understand. For these reasons, courts will not insist that the policyowner meet the same degree of strict compliance to the terms of the life insurance contract as it might in the case of the typical agreement. Because the insurance contract is a “take it or leave it” agreement in which the insurer selects all wording and there is no negotiation of the terms, ambiguities are typically interpreted in the policyowner’s (and beneficiary’s) favor and against the insurer.

For these reasons, many courts have adopted one or more theories that have made it possible to construe insurance policy language strictly against the insurer.

But because the life insurance contract is one requiring a great deal of reliance on the statements of the insured and/or applicant-owner, honesty—rather than reliance on the leniency of the courts—should be the watchword in the contractual process.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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