State Farm Insurance License Practice Exam

What characterizes a unilateral contract in an insurance context?

1. Both parties make binding commitments

2. Only one party is obligated to perform

3. The contract is negotiable between both parties

4. Exists in a verbal agreement only

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

In an insurance context, a unilateral contract is characterized by the fact that only one party is obligated to perform their part of the agreement. This means that when an individual purchases an insurance policy, they are making a promise to pay premiums, while the insurance company is the only entity that is committed to providing coverage in return if a qualifying event occurs. This characteristic is inherent in most insurance contracts, where the insurer assumes the risk and obligations outlined in the policy, while the insured generally only needs to fulfill their obligation to pay premiums. If the insured does not pay, the insurance company is not required to provide coverage, but once the premium is paid, the insurer is bound to provide the agreed-upon coverage as long as other conditions of the policy are met. In this context, other options don't accurately reflect the nature of a unilateral contract. While both parties making binding commitments would imply mutual obligations, that isn’t the case here. Negotiability between both parties is not typically a feature of insurance contracts, as they are largely standardized and pre-determined by the insurer. Additionally, a unilateral contract is not limited to verbal agreements, as it can also be executed in writing, which is the common form in insurance policies. Thus, the defining characteristic of unilateral