In an aleatory contract type, 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 insurance, an aleatory contract refers to an insurance arrangement in which 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. If the event does not occur, the promise outlined in the contract will not be performed.
How Aleatory Contracts Work
Risk assessment is an important factor to the party, taking a higher risk when considering entering into an aleatory contract. Life insurance policies are considered aleatory contracts, as they do not benefit the policyholder until the event itself (death) comes to pass. Only then will the policy allow the agreed amount of money or services stipulated in the aleatory contract. The death of someone is an uncertain event as no one can predict in advance with certainty that when the insured will die. However, the amount which insured`s beneficiary will receive is certainly much more than what the insured has paid as a premium.
In certain cases, if the insured has not paid the regular premium to keep the policy in force, the insurer is not obliged to pay the policy benefit, even though an insured has made premium payments for the policy. In some form of insurance contracts, if the insured doesn’t die during the policy term, then also nothing will be payable on maturity, such as with term life insurance.
The second type of aleatory contract is where each party takes on a defined level of risk exposure, which is the consideration of the engagement of the other. For example, when a person buys an annuity, they take on the risk of losing the money in the case of their death soon after. On the other hand, the person may live and receive three times the amount of the price s/he paid for it.