What is the term for a contract in which unequal amounts or values are exchanged, often involving a small premium and a larger potential payout?

The term "aleatory" refers to a type of contract in which the exchange of values is not equal, meaning that the performance under the contract is contingent upon uncertain events. In insurance, this typically manifests as scenarios where a small premium is paid in exchange for a potentially large payout upon the occurrence of a covered event. This reflects the fundamental nature of insurance, where the premium is designed to cover risks associated with potential losses that are uncertain in occurrence, thereby making the contract inherently aleatory.

This characteristic distinguishes aleatory contracts from others because the outcome is uncertain, and what one party might gain significantly exceeds the other party’s contribution, reflecting the unpredictable nature of insurance claims. Understanding this term is crucial for those working in insurance or studying personal lines, as it highlights the risk-sharing aspect fundamental to the insurance industry.