Final answer:
Insurance policies are referred to as contracts of adhesion, which are drafted by insurers and presented to insured individuals with little room for negotiation. In these contracts, ambiguities are typically interpreted in favor of the insured. This concept acknowledges the complexities of estimating risks and the impact of moral hazards.
Step-by-step explanation:
Because an insurer writes the policy language and the insured has little or no control over the content, any ambiguity in the wording is usually resolved in favor of the insured. As the design and wording of a policy are in the hands of the insurer, insurance policies are said to be an adhesion contract. This type of contract is offered on a "take-it-or-leave-it" basis by an entity that holds more power, such as an insurance company, leaving the potential policyholder with little or no ability to negotiate the terms.
Insurance operates on the principle of sharing risk among many, acknowledging that while future events are unpredictable, a measure of compensation can be provided for those within the group who suffer an unexpected loss. Premiums paid by the insured contribute to a pool that compensates those who experience the insured event. Considering the complexities of risk estimation and the occurrence of moral hazards when individuals are less inclined to avoid insured risks, it's crucial for policy language to be clear, yet contracts are still written such that ambiguities favor the insured.