New Jersey Life Producer Practice Exam

What is described as a unilateral contract in the context of insurance?

1. A contract where both parties share obligations

2. A contract where only one party gives a legally enforceable promise

3. A contract that can be canceled by either party

4. A contract based on mutual consent

The correct answer is: A contract where only one party gives a legally enforceable promise

In the context of insurance, a unilateral contract refers to a situation where only one party has made a legally enforceable promise. In the insurance realm, this primarily pertains to the insurer's obligation to pay a claim provided that the insured has fulfilled their part by paying the premium and adhering to the terms of the policy. The insurer agrees to provide coverage in exchange for these payments, creating the binding aspect of the contract. This characteristic differentiates unilateral contracts from bilateral contracts, where both parties express mutual obligations. In most insurance contracts, the insured does not have a corresponding promise that the insurer will definitely pay a certain amount or provide coverage for every situation; rather, the insurer's promise is contingent upon the occurrence of an insured event. Understanding this distinction is crucial as it highlights the nature of the insured’s responsibilities versus that of the insurer, reinforcing why the relationship is defined as unilateral.