DEFINITION of 'Aleatory Contract'

A contract type in which the parties involved do not have to perform a particular action until a specific event occurs. Events are those which cannot be controlled by either party, such as natural disasters and death. Aleatory contracts are commonly used in insurance policies. The insurer does not have to pay the insured until an event, such as a fire, results in property loss.

BREAKING DOWN 'Aleatory Contract'

Aleatory contracts are historically related to gambling, and appeared in Roman law as contracts related to chance events. In the insurance example, this is because the payouts to the insured are unbalanced. Until the insurance policy results in a payout, the insured pays premiums without receiving anything in return besides coverage. When the payouts do occur, they can far outweigh the sum of premiums paid to the insurer.

RELATED TERMS
  1. Cooperation Clause

    An insurance contract clause that requires the policyholder to ...
  2. Life Insurance

    A protection against the loss of income that would result if ...
  3. As Their Interests May Appear (ATIMA)

    Text in an insurance policy that allows other parties to be added ...
  4. Personal Lines Insurance

    Property and casualty insurance products for individuals that ...
  5. Annual Renewable Term (ART) Insurance

    A form of term life insurance that offers a guarantee of future ...
  6. Insurance

    A contract (policy) in which an individual or entity receives ...
Related Articles
  1. Insurance

    Understanding Your Insurance Contract

    Learn how to read one of the most important documents you own.
  2. Insurance

    Exploring Advanced Insurance Contract Fundamentals

    Understanding your contract can help you protect our family's financial security.
  3. Insurance

    Do You Need Casualty Insurance?

    Find out how different types of coverages can protect you and which policy is right for you.
  4. Insurance

    What Happens If Your Insurance Company Goes Bankrupt?

    When insurance companies go bankrupt or face financial difficulty, it's bad news for policy holders.
  5. Insurance

    Explaining Insurance

    Insurance is a form of contract between an individual and an insurance company that spreads risk in exchange for premium payments.
  6. Insurance

    How Much Life Insurance Should You Carry?

    Learn how much - if any - insurance you really need.
  7. Financial Advisor

    Advising FAs: Explaining Life Insurance to a Client

    Life insurance was initially designed to protect the income of families, particularly young families in the wealth accumulation phase, in the event of the head of household's death.
RELATED FAQS
  1. What is the average return on total revenue for the insurance sector?

    Learn about the three main segments of the insurance industry, and find out what the average return on revenues is for the ... Read Answer >>
  2. What are some examples of industries that practice price discrimination?

    Understand the various types of insurance coverage offered in the insurance marketplace, and learn why each policy should ... Read Answer >>
  3. How does the insurance sector work?

    Learn more about the insurance sector, a historically safe place for equity investors and the home of some of the largest ... Read Answer >>
  4. Can your insurance company cancel your policy without notice?

    Learn about your rights as an insured when it comes to your insurance policy being canceled, including how to access your ... Read Answer >>
Hot Definitions
  1. Block (Bitcoin Block)

    Blocks are files where data pertaining to the Bitcoin network is permanently recorded.
  2. Fintech

    Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century.
  3. Ex-Dividend

    A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be ...
  4. Debt Security

    Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount ...
  5. Taxable Income

    Taxable income is described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments ...
  6. Chartered Financial Analyst - CFA

    A professional designation given by the CFA Institute (formerly AIMR) that measures the competence and integrity of financial ...
Trading Center