August 1, 2021
What is an Insurance Adhesion Contract?
An adhesion contract is an agreement between two parties. With this in mind, the particularity of an adhesion contract is that the party with superior bargaining power drafts the terms and conditions. Meanwhile, the other parties have little or no ability to negotiate more favorable terms. This dynamic usually develops between business and individuals. As a result, the consumer finds themselves in a “take-it-or-leave it” position. For this reason, courts carefully scrutinize adhesion contracts and will sometimes void certain provisions. However, this is generally on the basis that the provisions are unconscionable or the product of unequal bargaining power.
Furthermore, for a contract of adhesion to exist, the offeror must supply a customer with standard terms and conditions that are identical to those offered to other customers. And those terms and conditions must be non-negotiable. Thus meaning the weaker party in the contract must agree to the contract as it is rather than requesting to add, remove, or change clauses. Moreover, adhesion contracts are also referred to as boilerplate contracts or standard contracts.
Understanding Insurance Adhesion Contracts
Another quality adhesion contracts is that they are most usually used for transactions where there will be a high volume of customers. Who will all also fall under some standard form of agreement. For example, insurances, leases, vehicle purchases, mortgages, etc. In case of an insurance adhesion contract, the company has the power to draft the contract. Meanwhile, the potential policyholder only has the right of refusal. Furthermore, the insured cannot counter the offer or create a new contract to which the insurer can agree. However, in order to create a contract of adhesion, the insurer must provide the homeowner with standard terms and conditions. In short, they must be the same terms offered to other customers.
With this in mind, it is important to read over an adhesion contract carefully, since other parties write up all the information and rules. Moreover, remember that insurance companies are profit-seeking businesses and not charities. Also, adhesion contracts are usually enforceable in the United States thanks to the Uniform Commercial Code (UCC). In fact, the UCC helps to ensure that commercial transactions are taking place under a similar set of laws across the country.
History of Insurance Adhesion Contracts
First, adhesion contracts originated as a concept in French civil law. However, the United States did not adopt it until 1919 when Harvard Law Review published an influential article on the subject written by Edwin W. Patterson. Subsequently, most American courts adopted the concept.
Furthermore, the legality and enforceability of adhesion contracts has transformed over time. The case law and interpretation may vary from state to state, but it is generally agreed that adhesion contracts are an efficient way to handle standardized transactions. In fact, when done properly, adhesion contracts save companies and customers a great deal of time and money in terms of legal counsel. Nevertheless, the law around adhesion contracts is always evolving. For instance, the digital age has brought up a fair share of challenges. To illustrate, digital adhesion contracts signed online have had problems in court for burying clauses or making it difficult to read certain clauses. For this reason, a digital adhesion contract must now be as close to a paper contract as possible.
Enforceability of insurance Adhesion Contracts
As mentioned before, a contract must be a “take it or leave it” situation for it to be an adhesion contract. Although, adhesion contracts are subject to court scrutiny, and that scrutiny usually comes in one of two forms.
First, doctrine of reasonable expectations
In short, this doctrine is meant to test whether an adhesion contract is enforceable. For example, if the contract terms go beyond what the weaker party would reasonably expect, specific parts of an adhesion contract or the whole contract is unenforceable. However, whether a contract is reasonable in its expectations depends on the prominence of the terms. As well as the purpose of the terms, and the circumstances surrounding acceptance of the contract.
Second, the doctrine of unconscionability
On the other hand, unconscionability is a fact-specific doctrine arising from the same equitable principles, specifically the idea of bargaining in good faith. Moreover, unconscionability in adhesion contracts usually comes up if there is an absence of meaningful choice on the part of one party. For instance, one-sided contract provisions combined with unreasonably oppressive terms that no one would or should accept. In other words, if the contract is extremely unfair to the consumer, it will be likely declared as unenforceable in court.
Furthermore, the doctrine of unconscionability shifts the focus from what the customer might reasonably expect to the motive of the supplier. However, unconscionability is easier to argue if the supplier is making a significant profit from the agreement. This is especially important if the amount of profit is in some way tied to the weaker party’s lack of bargaining power. In fact, some legal experts have pushed back on this approach as it has implications in terms of the freedom of contract. In conclusion, this would be the legal concept that people can freely determine the provisions of a contract without government interference.
Are You Bound To A Contract Of Adhesion In The Eyes Of The Law?
Even if you’re not obligated to sign an adhesion contract, you are in obligation to commit to it once you do sign it. American law treats adhesion contracts just like any other contract. When you sign that contract, you’re legally bound to it even if you have not fully read the provisions.
However, you can dispute contracts of adhesion in certain cases. For example, Texas forbids insurance companies from using overly-complex language or ambiguous language on their insurance contracts and policies. Texas law requires insurance companies to write policies in a way that a person of average intelligence could understand. In cases like this, the policyholder can take the insurer to court and they’ll most likely win.
This law is common in most states, and it typically applies across all parties. The court will interpret any ambiguity or unclear provisions in the contracts in favor of the party who did not prepare the contract. Aside from that, contracts of adhesion are generally binding to all parties involved, just like any other contract with your signature.
Where are Insurance Adhesion Contracts Legally Acknowledged?
Adhesion insurance contracts are usually acknowledged in both common law and civil courts. Although, the effects they have in those jurisdictions may vary. Moreover, the lack of equal distribution of bargaining power can also set adhesion contracts apart from other types of traditional agreements.
How do Courts Rule in Lawsuits Involving Insurance Adhesion Contracts?
As discussed before, courts tend to rule in favor of the policyholder in many cases involving adhesion contracts. This usually happens because there is a misinterpretation of the terms and no negotiations occurred between the parties before a lawsuit.
Can a Policyholder Ever Alter an Insurance Adhesion Contract?
A rider can change or amend certain policies. This is a provision under the terms of a contract that allows a policyholder to make specified changes, usually at an additional charge. However, it is very rare for an insurance company to allow this.
But Yes, You Can Challenge An Insurance Adhesion Contract
People across America challenge their insurance adhesion contracts all the time. There are a number of different ways to do that. Like we said, some people challenge adhesion contracts because they’re labeled as an “unconscionable contract”. In order to prove this, the other party will typically point out specific clauses rather than try to prove the entire contract is unconscionable. Certain clauses face challenges more frequently than others. If the contract of adhesion has a clause requiring arbitration instead of litigation, for example, then that’s often a basis for an unconscionable contract.
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