Life & Health Insurance Exam (National Portion)General InsuranceMedium
A producer is explaining the concept of 'adhesion' as it applies to an insurance contract. Which statement accurately describes this characteristic?
- AThe contract can be canceled by either party without penalty at any time.
- BThe contract is between two parties who are equally involved in drafting its terms.
- CAny ambiguities in the contract will typically be interpreted in favor of the insured.
- DThe contract is legally binding only if both parties exchange equal monetary value.
Show answer & explanationAnswer & explanation
Correct answer: C. Any ambiguities in the contract will typically be interpreted in favor of the insured.
An insurance contract is a contract of adhesion, meaning it is prepared by the insurer (the stronger party) and accepted or rejected by the insured (the weaker party) without negotiation. Therefore, any ambiguities are resolved in favor of the insured.
Why the other options are wrong
- A. This describes a cancelable contract, not a characteristic related to how the contract terms are drafted.
- B. This describes a negotiated contract, not a contract of adhesion where one party drafts the terms.
- D. This describes an aleatory contract, where the exchange of value is unequal, not adhesion.
Contract of Adhesion
An insurance contract is a contract of adhesion because it is prepared by the insurer and accepted or rejected by the insured, who has little to no ability to negotiate the terms. As a result, any ambiguities are typically interpreted in favor of the insured.
- Insurer drafts the contract terms.
- Insured accepts or rejects without negotiation.
- Ambiguities are usually resolved in favor of the insured by courts.
Memory trick: Adhesion: stick to the rules, but courts stick up for you.