Insurance Law

1. Insurance Law 27 C H E A P T R “If anything can go wrong, it will.” Anonymous (1950s), known as Murphy’s Law

2. Learning Objectives • Insurance policies as contracts • Property insurance • Liability insurance • Bad faith breach of insurance contract 27 - 2

3. Overview • Each day, every person and every business faces the risk of physical and financial loss • In an insurance agreement, the party who would normally risk a particular loss (the insured) transfers – along with consideration (the premium) – that risk to another party (the insurer) which bears financial consequences if the particular risks materialize in the form of actual events (perils) 27 - 3

4. Specifics of Insurance • An insured is the person who acquires insurance on real or personal property or insurance against liability, or, in the case of life or health insurance, the person whose life or health is the focus of the policy, but the person to whom the insurance proceeds are payable is the beneficiary • Except for life insurance, the insured and the beneficiary generally are the same 27 - 4

5. Specifics of Insurance • Insurance policies must satisfy all of the elements required for a binding contract • Person makes application (offer) to insurance company for insurance coverage • If the insurance company accepts the offer, an insurance contract arises • Insured’s initial premium payment and future premium payments furnish consideration for the insurer’s promises of coverage 27 - 5

6. Specifics of Insurance • State law governs whether insurance contracts are covered by the statute of frauds • Once written, the policy generally is enforceable as written • If a dispute arises over policy language, courts interpret the provisions as an average person would understand them and construe ambiguities against the insurer • SeeProperty Owners Insurance Co. v. Cope 27 - 6

7. The Insurance Binder • A binder isan agreement for temporary insurance pending the insurer’s decision to accept or reject the risk • Example: World Trade Center Properties, LLC v. Hartford Fire Insurance Co. is about interpretation of property insurance binders issued shortly before the September 11, 2001, plane attacks on the World Trade Center Towers 27 - 7

8. Misrepresentation • Applicants for insurance have a duty to disclose all material facts about the risk so an insurer may make an intelligent decision about whether to accept the risk • An insured’s misrepresentation, if relied on by the insurer, is like any other contract: the contract is voidable at the election of the insurer 27 - 8

9. Proof of Loss & Time Limits • Within a specified time, the insured (for life insurance, a beneficiary) who seeks to obtain the benefits of an insurance policy must notify the insurer that an event covered by the policy has occurred 27 - 9

10. Proof of Loss & Time Limits • The insured (or beneficiary) must furnish reasonable proof of the loss-causing event • A sworn statement by the insured (called a proof of loss) about the loss and resulting damage is often required by the policy 27 - 10

11. Insurer’s Performance & Breach • Insurers perform obligations by paying out sums and taking other actions under the policy’s terms within a reasonable time after the occurrence of a covered event • If the insurer refuses to pay despite the occurrence of the covered event, the insured may sue the insurer for breach of contract • Compensatory and consequential damages • Perhaps punitive damages if denial in bad faith 27 - 11

12. Specifics of Property Insurance • An enforceable property insurance policy requires the person who purchases the policy (policy owner) to have an insurable interestin the property being insured • Insurable interest is a legal or equitable interest in the property that translates into an economic stake at the time of the loss 27 - 12

13. Covered & Excluded Perils • Insurers tend to (a) specify covered events (perils) for which the insured will be paid for resulting losses, or (b) broadly state coverage and specify excluded perils for which no payment will be made 27 - 13

14. Shelter Mutual Ins. Co. v. Maples • Facts: • While residing overseas, Maples contracted to have a home built in Arkansas and purchased homeowner’s insurance from Shelter • Maples took reasonable precautions to winterize the residence, but a water pipe froze and burst, leaving several inches of standing water • By the time of discovery months later, mold covered the interior surfaces of the residence and the house had to be demolished • Maples reported the loss to Shelter 27 - 14

15. Shelter Mutual Ins. Co. v. Maples • Procedural History and Legal Reasoning: • Shelter brought suit to deny coverage • District court found in favor of Shelter, reasoning that the policy language clearly provided that any loss due to mold was not covered • Appellate court: “Here, a covered peril, frozen pipes, caused an excluded peril, mold, which resulted in the loss….We disagree with the court’s reading of the policy…the plain language of the policy does not automatically preclude coverage.” 27 - 15

16. Shelter Mutual Ins. Co. v. Maples • Holding: • “…determinative question is a factual one: whether the frozen pipe or the mold was the dominant and efficient cause of the loss…[thus] we conclude a material issue of fact remains, and summary judgment was improper.” • Reversed and remanded 27 - 16

17. Personal Property Insurance • Real property insurance typically covers not only harm to a residential or commercial building, but also to personal property inside the real property • Lessees of real property may obtain renter’s insurance to cover their personal property • Personal property insurance for a specific item, such as a vehicle, is available 27 - 17

18. Personal Property Insurance • Personal property insurance policies are indemnity contracts, thus the insurer must reimburse the insured for actual losses to the insured property caused by a covered event, but reimbursement may not exceed the insured’s insurable interest or amount of coverage purchased (policy limits) 27 - 18

19. Special Issues • If real property insured under a valued policy is destroyed, the insured recovers the face amount of the policy regardless of property’s fair market value • Except for the valued policy, property insurance policies often contain a pro rata clause, which apportions loss among insurance companies if the insured purchased multiple insurance policies 27 - 19

20. Special Issues • A coinsurance clause states that for the insured to recover full cost of partial losses, the insured must buy property insurance in an amount equal to a certain percentage (e.g., 80%) of the fair market value • An increase of hazard clause states that the insurer’s liability will be terminated if the insured takes action materially increasing insurer’s risk 27 - 20

21. Special Issues • Under the right of subrogation, the insurer obtains all of the insured’s rights to pursue legal remedies against anyone who negligently or intentionally caused harm to the property 27 - 21

22. Liability Insurance • Liability insurance allows the insured the ability to transfer liability risks to insurer: • Personal liability • Business or comprehensive general liability • Professional liability or malpractice insurance • Workers’ compensation policies • Coverage for employers’ statutorily required obligation to pay benefits to injured workers 27 - 22

23. Liability Insurance • Liability policies generally protect against insured’s liability for negligence but not against insured’s liability for deliberate wrongful acts • Insurer’s obligation under a workers’ compensation policy relates to liability the insured employer would face under state law rather than employer’s negligence 27 - 23

24. Insurer’s Obligations • If another party states a legal claim against the insured and the claim is such that the insurer would be obligated to cover the insured’s liability if the claim were proven, the insurer has a duty to defend insured • Insurer must furnish, at its expense, an attorney to represent insured in litigation resulting from the claim against insured 27 - 24

25. Insurer’s Obligations • If a claim against the insured falls within the liabilities covered by the policy and the claimant is awarded compensatory damages, the insurer must pay the amount held to be due from the insured to the claimant, including court costs • Payment obligations are subject to the policy limits of the insurance contract involved 27 - 25

26. Insurer’s Obligations • Insurance policies allow insurers to settle claims of third parties who have made liability claims against the insured • Generally, the insurer’s preference • Insurers that unjustifiably refuse to perform obligations under a policy may be liable for a bad faith breach of contract claim • SeeVining v. Enterprise Financial Group, Inc. 27 - 26

27. Test Your Knowledge • True=A, False = B • Insurance policies are not like the typical contract and do not require consideration. • A binder isan agreement for temporary insurance pending the insurer’s decision to accept or reject the risk. • “Proof of loss” refers to the evidence in a lawsuit against an insured. 27 - 27

28. Test Your Knowledge • True=A, False = B • Paul owns a small house, but rents it to his cousin Deanna, so Paul does not have an insurable interest in the property. • A pro rata clauseapportions loss among insurance companies if the insured purchased multiple insurance policies. • Insurers must specifically exclude all perils which will not be covered by the policy. 27 - 28

29. Test Your Knowledge • Multiple Choice • Dr. Philamena was sued for malpractice, but is covered under a liability policy from Big Insurance. Could Big Insurance settle the case without Dr. Philamena’s consent? • (a) Absolutely • (b) Yes, as long as the settlement was not in bad faith • (c) No, an insurer must have the insured’s consent • (d) None of the above 27 - 29

30. Test Your Knowledge • Multiple Choice • For 2 years, ChemCo had a 50% increase in the number of worker’s compensation claims because the company failed to install required safety equipment. Could the insurer terminate the policy? • (a) No, because once a policy is written, it must continue until terminated by the insured • (b) Yes, under an increase of hazard clause • (c) Yes, under the subrogation clause 27 - 30

31. Thought Question • How should insurance claims be handled in major disasters, such as the damage caused by Hurricane Katrina along the Gulf Coast? 27 - 31