Tennessee Insurance Practice Exam

In an insurance context, what does the term 'unilateral contract' refer to?

1. A contract where both parties have obligations

2. A contract where only one party makes a promise

3. A contract that is enforceable in court

4. A contract with mutual consent

The correct answer is: A contract where only one party makes a promise

The term 'unilateral contract' in the context of insurance refers specifically to a situation where only one party makes a promise that is enforceable upon the performance of the other party. In this case, the insurer promises to pay a benefit upon the occurrence of a covered event, such as a loss or damage, while the insured does not have an obligation to perform any acts except for the payment of premiums. This type of contract is significant in the insurance industry because it establishes the insurer's responsibility to fulfill its promise, while the insured's obligation is limited to paying premiums and adhering to the policy terms. Therefore, when a claim is made after a loss, the insurer is bound to pay, demonstrating the essence of a unilateral contract: one party's promise is what creates the enforceable obligation. Understanding this concept is crucial for grasping the foundational aspects of insurance agreements and their implications for both insurers and insureds.