The Hidden Adhesive: Understanding Contracts Of Adhesion In Insurance Policies

A contract of adhesion is a legal concept wherein a contract is offered to one party by another, with the stipulation that the second party can only accept or reject the contract in its entirety without the opportunity to negotiate over the wording. This type of contract is typically drafted by a party with significant power and a legal team, and presented to a consumer with considerably less bargaining power. Insurance contracts are a prime example of a contract of adhesion, as they are usually prepared solely by the insurance company, with the insured party having little to no ability to change any terms.

Insurance contracts are a type of contract of adhesion

Insurance contracts are typically good examples of classic adhesion contracts. When purchasing insurance, the insured party will have some options to set limits and certain other terms of coverage, such as deductibles. However, when it comes to issuing the policy, the insurance company is firmly in control. Almost all of the terms of a typical insurance policy are boilerplate, with no variance between policyholders. The insured party, particularly an individual, has little to no ability to change any of the terms.

Adhesion insurance contracts are used for efficiency. From the insurance industry's perspective, it would be very costly and unmanageable to negotiate specific terms with every new insurance applicant. Insurance contracts are commonly used for matters involving leases, deeds, mortgages, automobile purchases, and other forms of consumer credit.

Adhesion contracts are also known as standard, standardised, or boilerplate contracts. They are meant to simplify business transactions by standardising the agreement between the supplier and the buyer. They are “take it or leave it” agreements, where the weaker party must accept the contract to obtain the product or service.

Courts may look at the doctrine of reasonable expectations to determine whether to strike down an adhesion contract. This doctrine states that a party who adheres to the other party's standard terms does not agree to the terms if the other party has reason to believe that the adhering party would not have accepted the agreement had they known of a particular term. In other words, people are bound by terms that a reasonable person would expect to be in the contract.

The insured party has little to no ability to change terms

The insured party has little to no ability to change the terms of a contract of adhesion. This is because the contract is offered on a "take it or leave it" basis, with the insured party only having the right to refuse the contract or accept it in its entirety. The insured party cannot negotiate or bargain over the wording of the contract and must either accept all the terms or reject them.

The reason for this lack of negotiation lies in the disproportionate bargaining power between the two parties. The insurer, as the party with superior bargaining strength, drafts the contract without input from the insured party. The insured party, typically an individual, has significantly less bargaining power and is faced with a contract that is largely non-negotiable.

While it may be challenging to effect changes to the terms of adhesion contracts, it is important to recognize their characteristics as they are commonly used in insurance and other industries. Adhesion contracts are often used for efficiency and standardisation, allowing for high-volume contract acceptance with identical terms for all users.

Adhesion contracts are used for efficiency

Adhesion contracts are typically used in situations with a high volume of customers who fit a standard form of agreement. Insurance contracts are a prime example of this. Insurance companies use adhesion contracts to apply similar coverage to a broad range of customers, ensuring consistency and efficiency in their operations.

The use of adhesion contracts in insurance also stems from the nature of the industry, where the insurer bears the "judicial risk" of predicting situations. The predictability of situations determined by the insurer is a significant advantage of adhesion contracts in insurance.

While adhesion contracts offer efficiency benefits, it is crucial to consider their limitations. The disproportionate power dynamic between the insurer and the insured can create a “take it or leave it” situation for consumers, limiting their ability to negotiate more favourable terms. Courts play a crucial role in scrutinising adhesion contracts to ensure fairness and protect consumers' rights.

They are take it or leave it agreements

A contract of adhesion is a legal concept wherein a contract is offered on a "take it or leave it" basis. This means that the agreement cannot be negotiated. The party being offered the contract can either accept or deny the agreement, but they cannot make a counteroffer.

In the context of insurance, a contract of adhesion refers to an agreement between the insurance company and the insured party, where the insurance company has the stronger bargaining position and sets the terms of the contract. The insured party typically has little to no ability to negotiate or change the terms of the contract and must either accept or reject the contract as it is.

The use of "take it or leave it" agreements in insurance is often justified by the insurance industry as a means to achieve efficiency. From the insurance company's perspective, it would be costly and impractical to negotiate the specific terms of each policy with every new insurance applicant.

However, it is important to note that "take it or leave it" agreements in insurance can create a power imbalance between the insurance company and the insured. The insurance company, as the drafter of the contract, has the opportunity to include terms that favour their interests. This can result in a one-sided agreement that may not adequately protect the rights of the insured.

To address this power imbalance, courts may apply the doctrine of reasonable expectations or the doctrine of unconscionability when interpreting and enforcing "take it or leave it" insurance agreements. The doctrine of reasonable expectations states that the contract should be interpreted based on what a reasonable person would expect to be included in the contract. On the other hand, the doctrine of unconscionability focuses on whether there was an absence of meaningful choice for one party due to one-sided provisions and oppressive terms.

In summary, "take it or leave it" agreements in insurance, or contracts of adhesion, are commonly used by insurance companies to standardise their policies and streamline the contracting process. While these agreements offer efficiency benefits, they can also create a power imbalance and potentially unfair terms for the insured. To mitigate these concerns, courts play a crucial role in scrutinising and interpreting these contracts to ensure fairness and protect the interests of both parties.

Courts may enforce adhesion contracts

Adhesion contracts are generally enforceable, but they are subject to greater scrutiny by courts due to the inherent power imbalance between the two parties. This scrutiny usually takes one of two forms: the reasonable expectations doctrine and the unconscionability doctrine.

The Reasonable Expectations Doctrine

Courts have traditionally used the reasonable expectations doctrine to test whether an adhesion contract is enforceable. Under this doctrine, specific parts of an adhesion contract or the whole contract may be deemed unenforceable if the contract terms go beyond or don't match what the weaker party would have reasonably expected.

Whether a contract is reasonable depends on the prominence of its terms, the purpose of the terms, and the circumstances surrounding the acceptance of the contract.

The Unconscionability Doctrine

The unconscionability doctrine has also been used in contract law to challenge certain adhesion contracts. It is a fact-specific doctrine arising from equitable principles, specifically the idea of bargaining in good faith. Unconscionability shifts the focus from what the customer might reasonably expect to the motive of the supplier.

Unconscionability in adhesion contracts usually arises if there is an absence of meaningful choice on the part of one party due to one-sided contract provisions combined with unreasonably oppressive terms that no one would or should accept.

Other Factors Affecting Enforceability

Courts will also consider other factors when deciding whether to enforce an adhesion contract, such as:

• The potential of unfair surprise
• The nature of the contract
• Unequal bargaining power
• Substantive unfairness

Courts will also construe any ambiguities in adhesion contracts against the drafter of the contract.

Frequently asked questions