Why Smart Contracts Are Being Tested for Real-World Legal and Insurance Claims

The rise of blockchain technology has moved far beyond cryptocurrency trading and decentralized finance. Today, the legal and insurance sectors are exploring how smart contracts can reshape compensation, claims, and settlements. These are self-executing programs that automatically enforce agreements, making it easier to enforce contracts in these industries.

According to Precedence Research, the global smart contracts market size is estimated to be around just $3.69 billion in 2025. From here, it is expected to jump to a whopping $815.86 billion by 2034. This exhibits a CAGR of 82.21%, which is among the highest across all sectors.

This shift is not just about speed but about transparency and fairness. These are the two issues that have long challenged traditional legal and insurance systems. This article explores how smart contracts are being tested for real-world legal and insurance claims.

The Push Toward Automation in Legal Settlements

Legal processes are often slow, costly, and prone to disputes over timing and accuracy. For instance, a ScienceDirect study notes that environmental lawsuits are particularly slow. Many environmental movements are increasingly taking companies to court. However, they promote slow justice to demobilize these movements.

Even when someone is harmed due to environmental issues or some other exposure, the payout is very complicated. When money changes hands as part of a settlement or insurance payout, delays are common.

Smart contracts offer an alternative: they allow payments to be made automatically once specific conditions are met and verified on the blockchain. Similarly, blockchain can also help track settlement amounts, which can benefit other victims.

Consider the example of the Sterigenics lawsuit. According to TorHoerman Law, Sterigenics uses ethylene oxide for commercial sterilization. Exposure to ethylene oxide is linked to breast cancer, lymphohematopoietic cancers, acute myeloid leukemia, immune system suppression, etc.

Thus, exposed individuals have filed lawsuits against Sterigenics. Blockchain can help record Sterigenics lawsuit payout per person in immutable ledgers.

These kinds of cases underscore the value of programmable systems that can automate transfers when documentation, verification, and approvals are complete. If such cases were managed through blockchain-based mechanisms, the process could be both faster and more transparent for all parties involved.

Are there risks of bias in automated legal settlements?

Yes, biases can arise if the rules encoded into smart contracts reflect flawed assumptions or incomplete data. While automation removes human subjectivity in execution, the initial programming and conditions must be carefully designed to ensure fairness, inclusivity, and equitable treatment.

How Insurance Providers Are Testing Blockchain-Based Claims

Insurance companies are gradually integrating smart contracts into their operations, especially for travel, health, and property insurance. Instead of manual claims processing, policies are being coded so that certain triggers can automatically release funds to the insured. This is being tested in both private and public pilot programs, particularly in regions trying to reduce fraud and administrative costs.

In Africa, several insurtech startups are experimenting with blockchain frameworks to bring faster and more accessible claim services to underserved populations. Farmers, for example, can now receive instant drought insurance payouts based on weather data recorded on blockchain.

According to Reuters, Lemonade introduced parametric insurance to help Kenyan farmers afford drought coverage. Through its Lemonade Foundation, they created a smart contract with an oracle that tracks rainfall and automatically pays claims. In 2023, 7,000 farmers received payouts without the need for claim adjusters or processing.

Similarly, Etherisc develops parametric insurance protocols, offering products like flight delay, life, health, and natural disaster coverage. Any insurance relying on verifiable external data can be implemented on a blockchain through an oracle.

Such examples show how automated agreements can support fairness and inclusivity in financial ecosystems.

Can smart contracts help prevent insurance fraud?

Smart contracts can significantly reduce fraud by ensuring that payouts only occur when predefined, verifiable conditions are met. Digital records, IoT devices, and blockchain-verified data create an immutable trail. This makes false claims easier to detect and harder to execute, which could save insurers substantial resources and improve policyholder trust.

Legal Recognition and Compliance Challenges

Although the idea of digital contracts sounds promising, legal systems worldwide have not fully adapted to recognize code as a form of enforceable agreement. Many jurisdictions still require traditional signatures, physical records, and human oversight for validation. This gap between innovation and regulation limits the speed at which smart contracts can enter mainstream use.

Some countries, including those in Africa’s growing fintech ecosystem, are beginning to draft blockchain-friendly legislation. Kenya, Nigeria, and South Africa have each taken steps toward creating regulatory frameworks for digital assets. If these efforts extend to smart contract governance, it could set a precedent for how future disputes and liabilities are handled.

A study in the SAFLII Journal notes that South African law does not formally recognize smart contracts. Efforts are being made to apply the Electronic Communications and Transactions Act, 2002 (ECTA) for regulatory oversight.

However, its scope and effectiveness for smart contracts remain woefully limited. On the other hand, developed regions like the European Union have developed the Data Act to address smart contracts.

Can smart contracts coexist with traditional contracts in hybrid systems?

Yes, hybrid contracts combine automated smart clauses with conventional legal terms. For example, a settlement might use blockchain to trigger payments while leaving arbitration, liability, and exceptions under standard contract law. Such hybrid systems allow organizations to leverage automation benefits without losing human oversight or legal enforceability in complex situations.

The Human Element in a Digital Agreement

Even as smart contracts promise automation, the human element remains central. Legal interpretation, ethical decision-making, and negotiation still require human reasoning. Smart contracts are tools, not replacements, for legal professionals. Their strength lies in execution, not judgment.

Human oversight is also critical when unexpected circumstances arise. Smart contracts operate strictly according to their coded instructions, which means they can’t account for nuances, emergencies, or errors outside their programmed conditions.

Lawyers and insurers provide the contextual understanding necessary to handle exceptions, interpret ambiguous situations, and ensure that outcomes align with fairness and intent.

Moreover, human involvement is essential in fostering trust among participants. While blockchain ensures transparency, many users, especially those unfamiliar with digital finance, still value guidance from professionals who can explain processes and verify results.

This combination of automated efficiency and human accountability helps bridge the gap between emerging technology and traditional expectations. This makes adoption smoother and more reliable.

The movement toward blockchain-driven legal and insurance systems is likely to grow as digital identities and decentralized data management become more prevalent. Governments, regulators, and financial institutions are closely monitoring developments, not just for efficiency, but also to capitalize on the opportunity to enhance accountability.

Smart contracts won’t replace human judgment or legal expertise, but they can eliminate unnecessary friction in processes that rely heavily on trust and verification. As these experiments continue, they may redefine how societies manage fairness, compensation, and responsibility in an increasingly digital age.