South Dakota Crop Insurance Practice Exam

What does it mean for a contract to be 'unilateral' in insurance terms?

1. Both parties must meet obligations

2. Only one party is bound to perform

3. Both parties have equal rights

4. It's a contract with mutual benefits

The correct answer is: Only one party is bound to perform

In insurance terminology, a 'unilateral' contract refers to an agreement where only one party is obligated to perform their part of the agreement. In the context of insurance, when a policyholder pays their premiums, the insurance company is the only party that is legally bound to provide coverage and pay claims as stipulated in the policy. The policyholder does not have any obligations in terms of future performance under the contract, aside from the duty to continue paying premiums to keep the coverage active. This structure highlights a key aspect of most insurance contracts: the insurer assumes the risk and promises to cover losses or liabilities that the insured might face. The unilateral nature signifies that while the insurer has obligations to fulfill, the insured's main responsibility is to comply with the terms like timely premium payments and reporting claims, without needing to perform further actions after the policy is in effect. In contrast, a bilateral contract would require both parties to perform certain obligations, such as in a standard sales contract where each party has exchanges they must fulfill. In the case of insurance, the focus remains on the insurer’s commitments once the contract is established upon payment.