Defining an Insurance Contract of Adhesion
What is an insurance contract of adhesion?
An insurance contract remains a contract of adhesion, in all essential respects, when it: (1) is in written provisions prepared by the insurance company, (2) is offered on a "take it or leave it" basis, and (3) is subject to the insured’s acceptance of the terms and conditions as written in order to obtain insurance coverage.
In any contract, the obligation of the insurer is substantially lessened if the insured does not have any notice of the provisions of the contract itself. In this regard , it is not to be presumed that the insured has notice of applicable provisions which have not been called to his attention. An insured will not be deemed to have knowledge of unfavorable provisions in a policy, absent notice which would have put a reasonable person upon inference. The insurance company which prepares the contract, and expects it to be signed and accepted, should give notice of provisions which it considers important to the protection of its own interests.
Security Mutual Life Insurance Co. v. Elledge, 93 P.2d 459, 460 (Utah 1939).
Characteristics of Adhesion Contracts
One of the multifold ways to approach Boomerang 101 is to look at the legal definition of various terms in the title, as well as in the subtitle, Enlightened Litigation, Insurance Contracts of Adhesion and Brokering Peace in Louisiana: Chapter 74 of the 2009 Louisiana State Law Institute Publications
If a stated definition is not provided in Boomerang 101, a series of subsequent entries will address the issue of insurance contracts as adhesion contracts. The key features of an adhesion contract include the following: 1. There is no real negotiation between the parties over the contract’s terms. 2. Adhesion contracts are offered on a take-it-or-leave-it basis by a party having the superior bargaining position. 3. Adhesion contracts are standardized; that is, they are written in a clear, concise manner and offered to consumers on a mass basis. 4. In Louisiana, adhesion contracts are contracts of adhesion only when one party to the contract (the insurer) is a mandated or licensed insurance provider (policyholder form). 5. Louisiana state jurisdictional tests for adhesive contracts are much stricter than federal jurisdictional tests for adhesive contracts. Adhesion contracts are commonly found in cases involving insurance coverage law.
Pros and Cons of Adhesion Contracts
The benefits of an adhesion contract to the insurer will vary according to the contract type and how it is written. Generally, the insurance company finds it beneficial that the contract of adhesion guarantees the company a certain premium income for a set term. An insurer benefits from an adhesion contract either directly from the premium payments or indirectly by reducing its risk of loss through subrogation if a claim occurs. An insurance company is also able to limit the information required of an applicant and avoid lengthy, time-consuming underwriting investigations.
The shortcomings of an adhesion contract to the insured range from slight to significant. Among the subtle problems is that a policyholder may have to pay for exclusions that reduce the value of the insurance to them. For example, many states for workers’ compensation insurance were covered only if a work-related injury occurred during the policy term. The policyholder had to purchase a second policy to cover the exposure for injuries that predated the policy. The insured paid twice and even longer than the coverage periods of either policy.
A more severe structural shortcoming of an adhesion contract is that the policyholder has little or no bargaining power, since most insurance companies use standard, off-the-shelf contracts printed in fine print for the policyholder to sign on site. The insurer typically prints the policies as they are to reduce costs and promote efficiency. However, this leaves the policyholder at the mercy of the insurer to understand the fine print and its exclusions.
Many critics of adhesion insurance contracts have raised concerns about the insurance industry’s increasing use of insurance forms to issue widely dispersed insurance policies without negotiating with the insureds about contractual terms. They have argued that this growing concern has brought about the creation of so-called standard policies, which are agreed upon in advance. These standard policies reflect a compromise between the insurers and policyholders, and typically are the result of intensive negotiations among representatives for the insurance industry, policyholders, and government agencies.
Legal Considerations and Consumer Safeguards
A major legal issue that arises with insurance contracts of adhesion is unconscionability of specific contract provisions. Typically, an insurance contract of adhesion is written in a convoluted manner that the average insured would have no chance of knowing or realizing the true nature, effect, and significance of the terms. Thus, the standard of review for unconscionable provisions in insurance contracts of adhesion is whether the insured was actually aware of the terms and intended to waive any rights or benefits. Insurance policies routinely contain waiver provisions, such as for coverage exclusions and time limitations and providing that failure to comply will be grounds for denying coverage or forfeiture of claims. There are two forms of unconscionability that are analyzed in regard to insurance contracts, procedural and substantive. Procedural unconscionability involves the inequality of bargaining power between the insurer and insured, while substantive unconscionability focuses on the overly harsh or one-sided nature of the contract terms. Courts closely examine the circumstances in which such contracts are made and what the insured actually knew.
There are a number of consumer protections in place to legislate against unconsionability of insurance contracts of adhesion:
The law mandates that an insurer shall not require any additional consideration or payment for any notice, proof of loss, appraisal, reformation, cancellation, claim forms, or other paper related to a claim or loss under the terms of the contract.
The law prohibits claims handling practices by insurers that are misleading, deceptive, unfair, aggrieve, or injurious to the public.
Under the law, insurers are not allowed to enforce a forfeiture or other restrictive provision in an insurance contract unless the insurer has demonstrated to the court by a preponderance of the evidence that the forfeiture or restriction did not affect the insured’s substantial rights.
Examples and Case Illustrations
One prominent case illustrating the application of the doctrine of adhesion in the insurance industry is the 1963 California Court of Appeal’s decision in MacKinnon v. Truck Insurance Exchange. In this case, the court found that an insurance policy’s subrogation clause was unconscionable when it barred recovery of attorney’s fees for a party who had been wronged by the insured’s fraud. Specifically, a home was destroyed by fire allegedly caused by the homeowners with intent to collect on the policy. After paying out on the claim, the insurer sued the homeowners, but sought to bar the homeowners from recovering their attorney’s fees when they successfully defended themselves in court. Despite the policy’s numerous provisions ostensibly in the insured’s favor, the policy as a whole was deemed unconscionable and unenforceable.
Leading insurance industry expert Professor Jeffrey Thomas emphasizes that these types of cases are frequently settled by most insurance companies before any judicial adjudication of the fairness of the contractual terms because of their inherent risk . He also notes that instances where courts have found adhesionary provisions of an insurance contract unconscionable or invalid have largely been limited to provisions which operate to negate the insurer’s duty to defend where the duty to defend is seemingly broader than the duty to pay damages under the policy or are otherwise unfairly one-sided in favor of the insurer. Professor Thomas speculates this trend derives from policies being written on standardized forms which contain uniform provisions across a wide range of insurers, meaning that the practical reality is that non-standard, bargained-for term could not be offered to the insured unless done so by all insurers.
These examples illustrate the delicate balance between regulating adhesionary contracts and allowing insurance companies to create standardized but potentially inflexible contracts. Whereas some courts have found provisions in insurance contracts to be unconscionable, others were more lenient. Policyholders have benefited immensely from this doctrine, but ongoing litigation continues to shape and moderate how insurance companies write contracts of adhesion.
How to Approach an Insurance Contract of Adhesion
Even when consumers have the best of intentions, negotiating with an insurance company is rarely a possibility. Thus, the Insurance Contract of Adhesion is usually the only way in which an insurance consumer can obtain a contract. And while there may not be room for back-and-forth over specific terms, people entering into these contracts can take steps to understand and assert their legal rights.
- Read the Entire Policy. Some consumers might be tempted to begin satisfying their curiosity about an insurance contract of adhesion by reading the exclusions or conditions section. While you need to pay particular attention to these areas, the fine print and big departures from the rest of the document are just as important. Try reading all the terms of the policy, line by line, without skipping sections. Circle and ask questions about terms you don’t understand and respect any exclusions or conditions you can’t live with once you consult with your insurance agent or another third party.
- Check for Acknowledgment of Receipt of Policy. Many insurance contracts require that you sign or return a copy of your policy upon first receiving it. Even if you don’t remember sending back the policy, check to make sure that you and your insurer have both signed a copy of the policy. This point becomes more pivotal when you make a claim against the policy. If in fact you haven’t signed that acknowledgment, the insurance company will attempt to tell you that your claim does not stand because you never acknowledged receipt of the policy; this allows them to treat the policy like it never happened. You can pre-empt this tactic by checking to make certain that you have a signed copy of the policy with an acknowledgment of receipt attached to it.
- Call Your Insurance Agent. whether or not you have suggestions for your policy terms and are in a position to negotiate, first give your insurance agent a call to raise any inquiries you have. The agent may have helpful suggestions concerning the policy’s terms. You can ask questions of your insurance agent, so don’t be afraid to raise your concerns.
- Make a List of Changes You’d Like to See On The Policy. Once you’ve read through the policy with your agent, you may come away with a list of suggested changes. Ask your insurance agent if these changes might be called "endorsements" and suggest these with them. Be clear about which portions of the policy you would like to be changed, and determine if any of these changes deviate from the standard insurance contract of adhesion requirements that your insurer would have to abide by.
- Consult With a Third Party. As noted above, you are allowed to consult with a third party or advisor. An uninsured third party can be your best friend—or anyone else you trust—to review the policy and help you understand which objections might hold water in mediation efforts with your insurer. An attorney might also be able to help you. Typically insured third parties are covered under the insurance contract of adhesion and may themselves review and begin a claim on the policy.
The Future Landscape of Adhesion Contracts in Insurance
The future of adhesion contracts in the insurance industry is one shaped by possible reforms to address these concerns. Some reforms proposed include making policy contracts more transparent and understandable, increasing consumer knowledge regarding these policies, and providing greater flexibility for consumer protection laws that could be used to regulate terms and conditions under the adhesion contracts. These proposed reforms include: (1) imposing a duty of good faith in composing, interpreting and managing such contracts; (2) creating regulations requiring counsel review of all adhesion contracts; and (3) creating an advisory committee to the state insurance board to educate the board on the need for more extensive regulatory reform and transparency requirements.
Whether such a level of reform is likely or necessary in the future is tempered by the fact that the broad regulatory framework already in place for the insurance industry in the United States promotes the uniform enforcement of the various consumer-protection statutes dedicated to insurance policies . Further, the bulk of individual states have within their state insurance codes and regulations provisions safeguarding their citizens from potential abuses and potential conflict with other more general laws, such as state contract laws.
In the absence of such sweeping reform, the use of technology in the insurance industry will also alter the way in which insurance adhesion contracts will be interpreted and enforced. As the insurance industry becomes more reliant on web-based contracts for execution, rather than more traditional written contracts, it will be subject to consumer protection laws that apply to online contacts (such as the Digital Millennium Copyright Act). It remains to be seen whether the emergence of a more technologically driven insurance placement system will curb the potential for discrepancies and deception in the integration of adhesion contracts.
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