You might not have encountered the term “adhesion contract” before, but it’s likely you’ve been involved in one. An adhesion contract is a written agreement where one party holds significantly more power than the other. A typical example is a credit card agreement: the issuing company usually dictates the terms, leaving the cardholder with little to no ability to negotiate or modify the contract.

What is an adhesion insurance contract?

Insurance contracts are prime examples of classic adhesion contracts. These agreements are typically drafted by the insurance company, and individual policyholders have little room to alter the terms. While buyers can choose certain coverage limits and deductibles, the insurance company controls most of the policy’s terms. These contracts are largely standardized, with minimal variation among policyholders.

From the insurance industry’s perspective, using adhesion contracts is an efficient approach. Negotiating individual terms with each applicant would be costly and impractical.

Characteristics of an adhesion contract

When dealing with adhesion contracts in insurance, several characteristics are nearly universal. Recognizing these traits can help you understand when you’re entering into such an agreement and how to protect your interests. Consider the following features:

Uniform Language: Adhesion insurance contracts often use standardized language across all agreements. The terms you sign are likely identical to those in thousands of other contracts. This uniformity is also common in automobile leases, rental and mortgage agreements, and consumer products like cell phones.

Unequal Bargaining Power: In adhesion contracts, one party, typically a business or corporation, holds significant power, while the other party, usually the consumer, has minimal ability to modify the terms.

One-Sided Benefits: These contracts generally favor the more powerful party, often at the expense of the consumer. While you may receive a product or service, such as insurance or a cell phone, the company dictates the contract’s rules and stipulations. For example, terms related to dispute resolution are typically designed to benefit the corporate party, increasing the likelihood that any disputes will be resolved in their favor.

Is car insurance an adhesion contract?

Car insurance policies are quintessential examples of adhesion contracts. The insurance company creates the policy terms, which are typically non-negotiable, presenting a classic “take it or leave it” scenario.

While there might be instances where a more influential consumer or business could negotiate some changes to the terms, these cases are uncommon. Ultimately, the insurance company retains control, as drivers need coverage and generally have no alternative but to accept the terms set by the company.

Are adhesion contracts enforceable?

The Uniform Commercial Code (UCC), which has been adopted with minor variations across all states, permits courts to enforce adhesion contracts. However, given the inherently imbalanced nature of these contracts, the UCC mandates that they be closely examined for fairness.

To address this imbalance, courts often apply the “reasonable expectations doctrine,” which allows them to interpret the terms of a contract, such as an insurance policy, to reflect the protections that a reasonable person would expect. This doctrine can be used to ensure that the contract’s interpretation aligns with what the insured party would reasonably anticipate, even if it deviates from the exact wording of the policy.

Additionally, the UCC addresses unconscionable contracts, allowing courts to invalidate an adhesion contract or parts of it if they find it to be “unconscionable at the time it was made.” Courts may also evaluate whether the contract’s terms are excessively unfair or burdensome to the weaker party, indicating that they were exploitative when the contract was established.

Do consumers benefit from adhesion contracts?

Adhesion contracts can offer certain advantages to consumers. They provide a clear and consistent set of terms and conditions, outlining rights and responsibilities in straightforward language. This uniformity ensures that all signatories receive the same benefits, creating a level playing field.

However, in most cases, adhesion contracts favor the corporate party. Consumers typically cannot negotiate or alter the terms, such as payment arrangements, which are set by the more powerful party. Additionally, important details may be hidden in fine print or scattered across multiple documents, making it difficult for those without legal expertise to fully understand what they are agreeing to.

Since adhesion contracts are usually offered on a “take it or leave it” basis, refusing to sign may mean that consumers cannot access the goods or services they need.

Can you change the terms of an adhesion contract?

Modifying the terms of an adhesion contract can be challenging, but there are instances where adjustments can be made to better suit your needs. In the insurance industry, this is often achieved through endorsements or riders, which are added to a new or existing policy to provide additional coverage or customization options. These modifications allow policyholders to tailor their policies in specific ways, though the insurer typically determines the available options. Here are some common endorsements for car insurance:

  • Accident Forgiveness: This coverage allows you to have one covered accident without affecting your insurance rate.
  • New Car Replacement Coverage: This add-on enables you to replace your newer car with a new model if your car is totaled in an accident.
  • Roadside Assistance Coverage: This endorsement covers breakdowns, towing, flat tires, and battery repair or replacement.

Endorsements are not limited to auto insurance. For homeowners, common endorsements include:

  • Water Backup Coverage: Also known as sewage backup coverage, this provides protection for sewer line backups that a standard homeowners policy typically does not cover.
  • Identity Theft Coverage: This add-on helps cover the costs associated with recovering from identity theft.

Life insurance policies may also come with riders, offering additional customization. Examples include:

  • Long-Term Care Rider: Allows policyholders to use life insurance benefits early to cover qualifying long-term health care costs.
  • Child and Spouse Riders: Provides a payout upon the death of an insured person’s child or spouse during the policy term.

Not all insurers offer the same endorsements, and the options available can vary. When shopping for coverage, it can be beneficial to review endorsement options from multiple companies to find the best fit for your needs.