Aleatory Contract
What Does Aleatory Contract Mean?
In legal terms, an aleatory contract is a contract that depends on an uncertain event; in other words, it is a contract in which there is no obligation for one party to pay another party or to do something until a specific event takes place.
Aleatory contracts have existed for hundreds (and possibly thousands) of years, first showing up in Roman law in relation to gambling and other uncontrollable chance events. Today, they are most commonly seen in insurance contracts.
With an insurance policy or contract, the risk is insured but nothing happens until a specific event occurs. In other words, the event or the extent of the indemnity provided by the insurer at the time the insurance contract is made is uncertain.
Using a life insurance policy as an example, someone’s death is an uncertain event that no one can predict in advance. However, if and when this uncertain event were to occur while the policy is in effect, then the life insurance policy is triggered and the insurer is obligated to pay a sum of money to the insured’s beneficiaries. Until then, nothing happens, even though the insured continues to pay premiums. If it is a term life insurance policy and it expires before the specified event occurs, nothing happens.
Insuranceopedia Explains Aleatory Contract
In an aleatory contract, the parties do not have to perform the contract’s obligations (i.e., pay money or take some action) until a specific event occurs that triggers the action. These events must be things that cannot be controlled by either party, such as a natural disaster or death/disability. Insurance contracts are the most common form of aleatory contract.
Since insurers do not usually have to pay policyholders until a claim is filed, most insurance contracts are aleatory contracts. Because of this, it is always possible that an insurer may never have to pay policyholders any money whatsoever. For example, if a person buys a health insurance policy and then never visits the doctor or gets injured during the policy period, the insurer may collect premiums and never have to pay the insured. But if the insurance company is called upon to pay, the amount of indemnity paid out to the insured usually far outweighs the total premium paid for the contract.
Annuities are another common form of aleatory contract. An annuity contract is an agreement between an investor and an insurance company where the investor pays either a lump sum or a regular premium to the insurance company. In exchange, the insurance company makes periodic payments to the annuity holder once a certain event/trigger occurs (i.e., retirement).
