An insurance policy is what type of contract?

An insurance policy is best categorized as a contract of adhesion. This term refers to a type of contract where one party drafts the terms and conditions and presents them to the other party on a "take it or leave it" basis. The insurer, having more power and resources, creates the insurance policy, and the insured has limited negotiating ability regarding the policy's terms.

In the context of insurance, once an individual applies for coverage and accepts the policy, they are adhering to the conditions set forth by the insurance company. This is crucial as it emphasizes the protective nature of insurance, which is designed to guard against unforeseen events, while also highlighting the imbalanced power dynamics that exist within these contracts.

Understanding that an insurance policy is a contract of adhesion clarifies the reasons why such contracts often contain provisions for coverage limitations and exclusions, which must be clearly stated to avoid misunderstandings. This nature of the contract is significant in legal settings as well, where ambiguity in the wording of the policy may be interpreted in favor of the policyholder.