Insurance Contracts: Adhesion Or Not?

Insurance contracts are typically considered contracts of adhesion. This is because they are usually drafted by the insurance company, with the insured party having little to no ability to change any of the terms. These contracts are often presented on a take it or leave it basis, with the consumer having no opportunity to negotiate more favourable terms. The insured party may have some options to set limits and certain other terms of coverage, but the insurance company ultimately has the power to issue the policy. Insurance contracts are considered contracts of adhesion due to the disproportionate bargaining power between the two parties.

Insurance contracts are adhesion contracts

Insurance contracts are a classic example of adhesion contracts. An adhesion contract is an agreement between two parties where one party has significantly more power in setting the terms of the agreement. In the case of insurance contracts, the insurance company has the upper hand in drafting the contract, and the potential policyholder can only accept or refuse the contract.

Insurance contracts are typically prepared solely by the insurance company and are lengthy documents with terms that the insured party cannot change. While the insured party may have some options to set limits and certain other terms of coverage, such as deductibles, the insurance company ultimately has the final say in issuing the policy. The terms of a typical insurance policy are usually boilerplate, with no variation between policyholders.

Adhesion contracts are used in insurance for efficiency. Negotiating specific terms with each new insurance applicant would be costly and unmanageable for insurance companies. Adhesion contracts allow for high-volume contract acceptance, with identical terms for all users.

However, it is important to note that adhesion contracts are subject to scrutiny by courts to ensure fairness. Courts may apply the "reasonable expectations doctrine" to balance the one-sided nature of adhesion contracts. This doctrine allows a court to interpret the language of an insurance policy to provide protections that an insured person would reasonably expect. Courts may also consider the doctrine of unconscionability, which deals with the contract formation process and the content of the contract. If a contract is found to be unconscionable, it may be invalidated or modified.

While it may be challenging to change the terms of an adhesion contract, it is important to recognize their characteristics and potential implications. Understanding these contracts can help individuals better advocate for themselves and make informed decisions when entering into insurance agreements.

Courts can strike down adhesion contracts

Adhesion contracts are often used for insurance, leases, deeds, mortgages, automobile purchases, and other forms of consumer credit. Courts have the power to strike down adhesion contracts or specific terms within them if they are deemed unconscionable or unreasonable.

The doctrine of reasonable expectations is used by courts to determine whether to strike down an adhesion contract. This doctrine states that a party is not bound by a term in an adhesion contract that they would not have agreed to if they had the chance to bargain. In other words, people are bound by terms a reasonable person would expect to be in the contract. Courts may also consider whether the provisions are written in clear, unambiguous terms.

Courts may also apply the doctrine of unconscionability, which focuses on the fairness of the contract formation process and the nature of the contract terms. Procedural unconscionability deals with the contract formation process and whether it was deficient, for example, due to duress, fraud, undue influence, or fine print. Substantive unconscionability deals with the content of the contract and whether the terms are oppressive, such as inflated prices, unfair disclaimers, immoral clauses, or terms that contravene public policy.

If a contract is found to be unconscionable, courts can invalidate the entire contract or specific provisions within it. This determination is made based on the specific facts and circumstances of each case.

In addition to the doctrines of reasonable expectations and unconscionability, courts may also consider other factors when deciding whether to strike down an adhesion contract. These factors include the prominence and clarity of the contract terms, the purpose behind the terms, the circumstances surrounding the acceptance of the contract, and the benefits to the signee and the obligations it imposes.

Overall, while adhesion contracts are generally enforceable, courts play an important role in scrutinizing and striking down adhesion contracts or specific terms within them that are deemed unreasonable or unconscionable. This helps protect the weaker party and ensure that the contract is fair and equitable.

Click-wrap and sign-in-wrap contracts are enforceable

Click-wrap and sign-in-wrap agreements are legally enforceable under the U.S. federal Electronic Signatures in Global and National Commerce Act ("ESIGN") and The Uniform Electronic Transactions Act ("UETA"). Under these laws, click-wrap and sign-in-wrap agreements hold the same status as "wet ink" signatures.

To ensure enforceability, click-wrap and sign-in-wrap agreements should conform to certain best practices:

• Require each user to affirmatively and unambiguously assent to the online terms.
• Provide conspicuous notice of the online terms.
• Get consent again any time the terms are modified.
• Maintain excellent records to show who agreed to the terms.
• Capture screenshots of what the screen looked like at the time the consumer agreed to the terms.

The courts often determine whether the agreements are enforceable by judging:

• Whether or not the user explicitly accepted the contract.
• Whether the user had actual or inquiry notice of the terms.
• The design and layout of the screen containing the click-wrap or sign-in-wrap agreement.

Businesses that are able to provide evidence of the above are more likely to have their terms enforced. The common types of evidence used to enforce these agreements in court are affidavits/declarations, screenshots, and back-end records of acceptance.

Adhesion contracts are efficient

Secondly, adhesion contracts reduce transaction costs, which are sunk costs accrued as a result of participating in an exchange. By standardising the agreement, adhesion contracts reduce bargaining, communication, and enforcement costs.

Thirdly, adhesion contracts are efficient for the drafting party as they eliminate the need for negotiation and individualised agreements for each transaction. This saves time and resources for the business, and allows for faster execution of the contract.

Finally, adhesion contracts are often used for faster execution in various commercial transactions due to their standardised nature and the absence of negotiation. They can expedite the contracting process and streamline interactions between parties.

Adhesion contracts are risky for customers

Adhesion contracts are typically used in high-volume scenarios and are drafted by one party with significantly more bargaining power than the other. The drafting party usually has a legal team to help create the contract, while the other party is usually a consumer with little to no bargaining power. As a result, adhesion contracts often contain terms that are unreasonably one-sided and favour the drafting party. For example, in the case of insurance contracts, the insurance company drafts the policy terms, and the insured party has little to no ability to change them.

Courts will scrutinize adhesion contracts closely to determine if they are unconscionable or unfair, and they may strike down specific terms or void the contract entirely if they are deemed unenforceable. To determine enforceability, courts use the “reasonable expectations” test, which looks at whether the terms are what the weaker party would have reasonably expected. They also use the “unconscionability” test, which examines the bargaining power of the parties and the fairness of the terms.

While adhesion contracts can streamline the contract management process and create economic efficiency, they also pose risks for customers due to the unequal power dynamics and the potential for unfair terms.

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