What is A Unilateral Contract?
A unilateral contract is a one-sided, uncommunicated agreement that offers something in exchange for an act to be performed. For a unilateral contract to be formed, two elements are required: (1) an offer to do something and (2) the performance of that act. A unilateral contract differs from a bilateral contract mainly by requiring the performance of the act to create an enforceable contract.
The unilateral contract does not require an immediate acceptance. Once the requested action is performed (i.e. , the item is bought or the service is used), the contract has been accepted. Some examples of unilateral contracts are: insurance policies, reward programs, phone plans, coupons, and one-time service purchases.
Insurance Contracts as Unilateral Contracts
In order for an insurance policy to be a unilateral contract, there are just a few criteria that must be met, including the following:
- It’s an agreement. Both parties must come together in order to agree to the terms of a contract. In your insurance policy, the insurance company agrees to insure your property. They will cover the risk you take when you purchase an insurance policy. To buy insurance is to agree to pay the monthly premiums. The agreement is a mutual one – but read on.
- An insurance company agrees to a promise to make a promise if a party in the contract upholds their end of the agreement. As the insured, you agree to uphold your end of the contract by paying the premium faithfully, and the insurer agrees to uphold theirs by paying out settlements if something happens to your insured property/vehicle, and if any other promises in the contract are kept.
- Once the conditions of the agreement are met by the policyholder, the insurance company must abide by their end of the unofficial deal. For insurance contracts, the promise is to pay only if certain conditions are met. For example, the insurance company will pay damages if you have a house fire, and you have kept up on your policy by paying premiums and the house fire is covered under the terms of the policy.
So, while they don’t always function like you would expect a contract to function given the above criteria, insurance policies are indeed unilateral contracts.
How The Conditions and Premiums Work
The requirement to fulfill conditions and premiums plays an essential role in determining whether an insurance policy is legally binding upon both parties. The policyholder’s obligations under the insurance contract are, however, mainly restricted to the payment of premiums. Therefore the insurer is bound under its legal obligations once the policyholder has satisfied this single condition. However, this does not free the policyholder from complying with any other conditions.
Thus we must consider the position of the policyholder whichever type of insurance contract or event is in question. The policyholder’s obligation is not merely to pay the premium but also to ensure that the risk in question is insured or that the policy is ‘live’. The significance of the insurance which is the subject of the contract depends upon the facts of each case. Accordingly it is important that the policyholder takes care to safeguard the subject matter insured. There may be a number of different ways discussed in the policy to allow the policyholder to fulfil the obligation to comply with the conditions. These include notifying the insurer of any change in the risk, providing documentary evidence (in the case of motor insurance) or by taking precautions to avoid loss. It should be noted that the insurer is entitled to refuse liability for any loss which has arisen as a result of a breach of the conditions laid down in the policy or of any other restrictions which have been imposed by the insurer.
The purpose of the condition clause is to ensure that the insurer does not face endless liability once a contract has been concluded. Every insurance policy will include a number of conditions which, if broken, will discharge the insurer from liability. A policy will not be discharge in total however, if some of the conditions are successfully satisfied. For example if the insurer has stipulated that the insured must notify it if he or she is about to go abroad and the insured does fail to inform the insurer, the insurer will not be discharged from liability for any losses in respect of which it would have been liable if the condition had not been included i.e. in respect of a loss which occurred whilst the insured was within a given geographical location.
The policyholder has a legal duty to pay a premium on the policy which has been taken out. The insurer must be notified of non payment of the premium so as to give the policyholder the opportunity to pay the premium, where he intends to continue with the contract. If the insurer fails to cancel the policy prior to the loss, the insurer will still be liable to pay. However, if the policy is cancelled either by the policyholder or the insurer, the insurer is discharged from liability.
The above example demonstrates the level to which the insurer has control over the risk during the life of the contract. The insurer will refuse to fulfil its part of the bargain if the insured fails to pay his premiums and if the insurer cancels the policy and decides not to carry on with it, it cannot then ask the policyholder to fulfil any of his contractual obligations. If the insurer is not prepared to fulfil its part of the bargain, it cannot ask the policyholder to fulfill his part. If the insurer is prepared to suspend its obligations during the life of the policy, the insurer must take the initiative in ensuring that the policy is suspended or cancelled. Therefore if the policyholder fails to comply with the requisite conditions, the insurer’s obligations will be suspended. If the insurer wishes to rely on that fact rather than cancelling the policy, it must take the requisite steps to get its position back on track.
Legal Side of Unilateral Contracts
When it comes to the enforcement of various terms in a policy, the unilateral contract principle makes things pretty clear: what is left up to the insurer’s discretion regarding payment will be left with the insurer; what is left up to the policyholder will be left with the policyholder. Where a dispute arises on a payment issue, the insurer’s basis for denying payment must be reasonable; if the term is expressly defined and the insurer denies payment that clearly fell within the insured risk, the insurer could be liable for bad faith of the substantive law. Something to keep in mind in insurance policies is that statutes of limitations apply to claims and the outlay of payments beyond what would be expected by the prudent man . This means that if a claim is not sustained, and payment is not demanded for several months, the insurer may bring the argument that the insured has waited too long to pursue the claim.
The enforcement of policy terms may also run into issues depending on where the court suit is filed. If the jurisdiction allows the suit to be heard, the jurisdictional issues may have been waived by the policy’s voluntary acceptance, and thus not be binding. Speculative claims may be harder to prove than other claims. Where an insured does not have a verifiable loss, there may be problems associated with a claim. Negligence and fraud defenses may be asserted. Also, if there is a fraud claim and the evidence against the policyholder is strong, the insurer can abandon successor liability when a subrogation is brought by another policyholder or group of policyholders.
Myths About Insurance Contracts
One of the biggest misconceptions about insurance contracts, is that they are bilateral. People believe that because insurance companies exchange promises and premiums, the contract must be bi-lateral, or 2-sided. While it may feel like a bilateral contract, it’s not. Bilateral contracts, such as sales of goods or services, require an offer and an acceptance of that offer. For example, when you go into a store and purchase an item, there’s an offer to sell, an acceptance, and the transaction is final. Any problems fall under local goods and services law, and the parties know exactly what’s expected of them at the end of the sale. Much to the shock of the offeror, however, an offer to insure does not bind the insurer until the insurance company agrees to issue a policy for the applicant. There’s a reason your auto or home policy will have an effective date. That’s when you’re insured under the terms of the policy. It’s also important to note, that your application signing and insurance premium payments are not waivers to an insurer’s right to decline the offer. In fact, an insurer can even deny a claim for a popular "misrepresentation" that wasn’t even intentional. By definition, an insurance contract: gives up certain legal rights in exchange for payment. This concept holds true today, as we’re often exchanging legal rights for money when we go shopping for insurance. But there’s much more to it than this. An insurance contract is a promissory contract (1) legally binding on both the insurer and insured, (2) capable of being enforced in a court of law regardless of whether the insurance company did its due diligence in vetting the applicant, (3) which holds that the insured can sue for more than is paid out on a claim when the insurance company acts without good faith, (4) and is governed by laws, rules and regulations that must be met by both the insurer and the insured. In other words, there’s a lot of very important information under the title of contract that extends beyond saying the insurer backs-up the promises made in the insurance policy. For these reasons, insurance companies are experts in fine print. Unlike other transfers of goods or services, an insurance company is giving up a legal right (the obligation to pay a claim), for a fee (the insurance premium). In every policy, there are certain obligations the policyholder must meet to maintain coverage. If not met, the insurer does not have to continue the policy, and can decline to pay the claim. In sum, whether one calls it an insurance policy, generically an insurance policy, an indemnity clause, or just plainly the terms and conditions, it is still a unilateral contract. Likewise, if you ask an insurance company, they’ll tell you it’s an indemnity agreement. Either name describes the insurance contract adequately. Or, at least, something close enough to the definition as to make the contract legal and binding. And like other contracts, insure that before signing, you read the terms and conditions.
Examples and Case Studies
The unilateral nature of insurance policies has been highlighted in several real-life examples. A classic example is the case of Greenfield v. Insurance Co. of N. Am. which was decided by the Delaware Court of Chancery in 1981. In that case, the plaintiff made a claim relating to a car accident that occurred in 1973. The claim was filed under the policy issued in 1972. At the time the policy was issued the insurance company had an anti-stacking clause that limited the recovery to the limit of insurance for bodily injury caused by one person per accident. In 1973, the policy covering the same vehicle had no such limit. The insurance company denied the claim based on the anti-stacking clause in the companies policy. Plaintiff tried to recover from the company under the more recent policy. The court found that the policy was a unilateral contract and, as a result, the insurance company was bound by the contract which was in effect at the time of the accident. It stated: "[The] insurance policy was a unilateral contract, which did not bind applicant unless premiums were paid during the life of the policy. Here, applicant had failed to pay the required premium for the 1973 policy; thus, it was without force and effect until the premium had been paid."
A Modern Example of the Unilateral Nature of Insurance Policies is Found in the case of Herman v. Roth where the waiver of premium provision of a life insurance policy was triggered when the insured spouse entered a long-term care facility . The insurance company paid the claim, and then set its sights on the base policy for the remaining death benefit. It filed a lawsuit to have the premium waived amount deducted from the remaining base policy, leaving little more than zero. While the court was largely concerned with questions around the disability standard and the propriety of the premium waiver, it dispensed with any mention of the term "unilateral" blindness by declaring, "[the insurance company] cannot question the validity of the waiver of premium provision." Thus, the court accepted the insurance company’s unilateral act of paying the claim, as if it had been the beneficiary of reciprocity.
A memo from 2013 already noted: "Many of the cases focus on the unilateral nature of insurance contracts as a whole and whether it is fair to require an insurance company to pay for everything when the insured has not complied with all of the terms, whether or not the company has what it needs to process the claim, and whether or not the insurance company can be forced to pay for less than is requested in circumstances where the insured has failed to file a timely claim or has failed to complete the medical records request or has failed to complete the claim form…. Courts have continued to reiterate that the material provisions of an insurance policy in the context of compliance need to be applied in the claim handling process in addition to the duties of the insurer and insured arising out of other state laws."