Insurance contracts are unilateral in nature. What does this mean?

• A. The insured must pay premiums only if a loss occurs.
• B. Only the insurer makes a legally enforceable promise to perform if a specified event occurs.
• C. Both the insurer and the insured are equally obligated to perform specific actions.
• D. The contract can be terminated at any time by either party without penalty.

Answer: (B)

Verified step by step guidance

1. Understand the term 'unilateral contract' in the context of insurance. A unilateral contract is one where only one party makes a legally enforceable promise.
2. In insurance contracts, the insurer promises to pay for covered losses if a specified event occurs, such as an accident or damage, while the insured is not obligated to perform any specific action beyond paying premiums.
3. Analyze the options provided in the problem. The correct interpretation of a unilateral contract is that only the insurer makes a legally enforceable promise to perform if a specified event occurs.
4. Eliminate incorrect options: For example, the insured does not pay premiums only if a loss occurs; premiums are paid regularly regardless of loss. Both parties are not equally obligated, and the contract cannot be terminated at any time without penalty.
5. Conclude that the correct answer is: 'Only the insurer makes a legally enforceable promise to perform if a specified event occurs.' This aligns with the definition of a unilateral contract in insurance.