Aleatory Contract
What Does Aleatory Contract Mean?
In legal terms, an aleatory contract is one that depends on an uncertain event. In other words, it is a contract in which one party has no obligation to pay or perform until a specific event takes place.
Aleatory contracts have been in existence for hundreds, if not thousands, of years, with their origins in Roman law related to gambling and other unpredictable events. Today, they are most commonly found in insurance contracts.
In an insurance policy or contract, the risk is insured, but no action occurs until a specific event takes place. The event and the extent of indemnity provided by the insurer are uncertain at the time the contract is made.
For example, with a life insurance policy, a person’s death is an uncertain event that cannot be predicted. However, if and when this event occurs while the policy is in effect, the life insurance policy is triggered, and the insurer is obligated to pay a sum of money to the insured’s beneficiaries. Until that event happens, even though the insured continues to pay premiums, nothing occurs. If it is a term life insurance policy and it expires before the specified event happens, no payment is made.
Insuranceopedia Explains Aleatory Contract
In an aleatory contract, the parties are not required to fulfill the contract’s obligations (such as paying money or taking action) until a specific event occurs that triggers the action. These events must be beyond the control of either party, such as a natural disaster or death/disability. Insurance contracts are the most common form of aleatory contract.
Since insurers generally do not need to pay policyholders until a claim is filed, most insurance contracts are aleatory. This means it’s possible that an insurer may never have to pay policyholders any money. For instance, if a person buys a health insurance policy but never visits a doctor or suffers an injury during the policy period, the insurer may collect premiums without ever having to pay the insured. However, if a claim is made, the indemnity paid to the insured usually exceeds the total premiums paid.
Annuities are another common example of an aleatory contract. An annuity contract is an agreement between an investor and an insurance company in which the investor pays either a lump sum or regular premiums to the insurer. In return, the insurance company makes periodic payments to the annuity holder once a certain event or trigger occurs, such as retirement.
