The document provides an overview of key concepts in insurance law, including:
1) Insurance allows an insured to transfer risk to an insurer in exchange for premium payments.
2) An insurance policy must satisfy contract requirements and be interpreted based on an average person's understanding.
3) Coverage disputes may involve determining whether a covered or excluded peril was the proximate cause of a loss.
3) Insurers have duties to defend claims potentially within the policy's scope and indemnify insured for covered losses up to policy limits.
Finals of Kant get Marx 2.0 : a general politics quiz
Chapter 27 – Insurance Law
1. C H A P T E R
27
Insurance Law
If anything can go wrong,
it will.
Anonymous (1950s)
known as Murphy’s Law
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2. Learning Objectives
• Explain contractual relationship
between insurer and insured
• Learn how to interpret policy clauses
• Understand insurance terminology
and concepts: subrogation,
insurable interest, coinsurance, bad
faith, duty to defend
• Identify types of liability insurance
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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)
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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
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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
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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
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7. The Insurance Binder
• A binder is an agreement for temporary
insurance pending the insurer’s decision to
accept or reject the risk
• World Trade Center Properties, LLC v.
Hartford Fire Insurance Co. concerns the
interpretation of property insurance
binders issued shortly before the
September 11, 2001, airplane attacks on
the World Trade Center Towers
– One occurrence or two?
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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
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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
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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
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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
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12. Specifics of Property Insurance
• An enforceable property insurance
policy requires the person who
purchases the policy (policy owner) to
have an insurable interest in 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
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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
Volcano damage is rarely covered
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14. 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
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15. 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
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16. 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.”
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17. 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
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18. Indemnity Contracts
• Property insurance policies are
indemnity contracts, thus insurer must
reimburse the insured for actual losses to
insured property caused by a covered
event, but reimbursement may not
exceed the insurable interest or amount
of coverage purchased (policy limits)
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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
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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 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 that materially
increases insurer’s risk
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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
Apartment fire
spread to other
apartments
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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
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23. Liability Insurance
• Liability policies generally protect against
insured’s liability for negligence but do
not cover deliberate wrongful acts
• Auto-Owners Insurance Co. v. Harvey: a
teenager pleaded guilty to involuntary
manslaughter for the death of another
teen. Court concluded that insurance
covered the related civil suit because an
intentional wrongful act had not been
proven.
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24. Liability Insurance
• Under a workers’ compensation
policy, injured employees need
not prove negligence on the
part of their employer in order
to be entitled to benefits, thus
the insurer’s obligation relates
to liability the insured employer
would face under state law
rather than employer’s
negligence
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25. 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
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26. Medmarc Casualty Insurance Co. v. Av
• Facts and Procedural History:
– Medmarc Casualty obtained declaratory
judgment that it had no duty to defend its
insured (Avent America) from product
liability suits arising from manufacture of
children’s products containing Bisphenol-A
(BPA), a harmful chemical
– Policy covered claims arising from “bodily
injury,” but suits claimed only economic
damages
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27. Medmarc Casualty Insurance Co. v. Av
• Opinion:
– Rule that insurer must provide
defense if claims are potentially
within the scope of the policy
cannot apply; even if plaintiffs
proved each factual allegation,
they could never collect for a
bodily injury that they never
alleged in the complaint
– Medmarc had no duty to defend
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28. 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
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29. 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
– See Vining v. Enterprise Financial Group, Inc.
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30. Test Your Knowledge
• True=A, False = B
– Insurance policies are not like the typical
contract and do not require
consideration.
– A binder is an 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.
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31. 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 clause apportions 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.
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32. 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
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33. 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
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34. Thought Question
• How should insurance claims be
handled in major natural disasters?
Aerial view of flooding caused by Hurricane Katrina
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Hinweis der Redaktion
Prior to the September 11, 2001, attacks that destroyed the World Trade Center (WTC) towers, 22 insurance companies had issued property insurance binders covering the WTC complex. These binders were issued to Silverstein Properties, Inc., the holder of a 99-year lease of the WTC complex under an agreement with the Port Authority of New York and New Jersey. A binder is a temporary contract of insurance that is in force until a formal insurance policy is issued by the insurer. The 22 insurers intended to issue formal insurance policies to Silverstein, but very few had done so as of 9/11. Therefore, the binders established and limited their obligations to pay Silverstein after the destruction of the WTC complex. In the litigation that ensued, a federal court agreed with an argument made by insurers Hartford, Royal, and St. Paul: that their binders should be interpreted as containing the terms set forth in a form binder known as the “WilProp form,” which had been circulated among many of the various insurers. The WilProp form made the insurance coverage applicable on a peroccurrence basis and contained a specific definition of occurrence. The court then addressed the critical issue: whether, for purposes of the binders at issue, the two plane attacks that destroyed the WTC towers on 9/11 were one occurrence or, instead, two occurrences. The district court held that in view of the WilProp form’s definition of occurrence, the two plane attacks on the WTC were one occurrence for purposes of those companies’ binders. Another insurer (Traveler’s) had a binder that did not define “occurence” and the district court concluded that there were genuine issues of material fact to be resolved by a jury in regard to the plane attacks on the WTC and whether the attacks were one occurrence or two. The lessor of the building challenged the court’s ruling. The Second Circuit Court concluded: “[W]e are not called upon here to decide whether there was one occurrence or two [for purposes of the Travelers binder]. [Instead, we must determine] only whether the district court properly concluded that because there is no well-settled definition of the term occurrence under New York law, the Travelers binder was sufficiently ambiguous to preclude summary judgment and to permit the factfinder to consider extrinsic evidence of the parties’ intent. [We agree with the district court and hold that] the meaning of the undefined term occurrence is an open question as to which reasonable finders of fact could reach different conclusions. District court’s grant of summary judgment for Hartford, Royal, and St. Paul affirmed; district court’s denial of Silverstein’s motion for summary judgment against Travelers affirmed; case remanded for further proceedings.”
Photo is of fishing boats after Hurricane Katrina hit South Plaquemines Parish, Louisiana.
The certificate of death is the typical proof of loss required for payment on a life insurance policy.
Basically, a person has an insurable interest if s/he would suffer a financial loss in the event of harm to the subject property
Photo is of Mount St. Helens, which erupted on 5-18-80 in Washington state. As a result of the eruption, 57 people were killed (21 never recovered). Damages included the destruction of more than 200 houses and cabins, leaving many people homeless. “Many tens of thousands of acres of prime forest, as well as recreational sites, bridges, roads, and trails, were destroyed or heavily damaged. More than 185 miles of highways and roads and 15 miles of railways were destroyed or extensively damaged. Trees amounting to more than 4 billion board feet of salable timber were damaged or destroyed.” In addition, “nearly 7,000 big game animals (deer, elk, and bear) perished in the area most affected by the eruption, as well as all birds and most small mammals…. [and] 12 million Chinook and Coho salmon fingerlings were killed when hatcheries were destroyed; these might have developed into about 360,000 adult salmon.” (see http ://vulcan.wr.usgs.gov/Volcanoes/MSH/May18/description_economic_impact.html)
Lessees of real estate would be wise to obtain insurance policies to cover their personal property in the leased premises since lessor’s policy may not cover lessee’s personal property.
The hyperlink is to the Eighth Circuit’s opinion. The facts set forth were as stipulated (i.e., as agreed to) by the parties. While residing in Saudi Arabia, Maples contracted for the construction of a single-family retirement home in Arkansas. Maples purchased homeowner’s insurance from Shelter, whose policy, issued in November 2000, was in full effect at all times relevant to the case. The two-story residence, which had a wooden frame and a basement made of concrete, was largely complete as of November 2000. Maples, who remained in Saudi Arabia, took reasonable precautions for winter weather by leaving a key with the contractor and asking him to winterize the residence. At some unknown time, a water pipe froze and burst. As a result, between four to six inches of water stood continuously in the basement until the contractor discovered the problem in April 2001. The standing water caused only minimal structural damage to the basement, but the humidity from the standing water caused mold to form on all of the interior surfaces of the residence. As a result of the mold, the residence became uninhabitable and had to be demolished. Maples reported the loss to Shelter
Shelter Mutual Insurance Co. brought a declaratory judgment action against Tommy and Bessie Maples (referred to collectively as “Maples”) in the United States District Court for the Western District of Arkansas. Shelter asked the court to declare that Shelter had no obligation to pay a claim made by Maples under a homeowner’s insurance policy issued by Shelter. After the federal district court granted summary judgment in favor of Shelter, Maples appealed to the United States Court of Appeals for the Eighth Circuit, which reviewed the policy de novo.
Court: “It appears to us, then, that the determinative question is a factual one: whether the frozen pipe or the mold was the dominant and efficient cause of the loss. …Because the parties’ factual stipulation does not answer this question, we conclude [that] a material issue of fact remains, and [that] summary judgment was improper. District court’s grant of summary judgment in favor of Shelter reversed; case remanded for consideration of causation issue.”
How would coverage for a house fire differ for a renter compared to an owner? Co-owners? What is the insurable interest of a mortgage company? If your house is worth less than the coverage due to the poor economy, what is the expected result of an insurance claim? What if the house is far more valuable due to the housing market than the insurable interest?
What if an insured stores hazardous or dangerous materials in their garage?
Hyperlink is to the court’s opinion in pdf. Brandy Harvey, age 16, and Toby Gearheart, age 19, were at a Wabash River boat ramp one evening. When a disagreement arose, Brandy moved toward Gearheart and pushed him toward the water more than once. When she again approached Gearheart, he put his hands on her shoulders and pushed her. Brandy lost her balance and fell off the boat ramp, down a rocky embankment, and into the river, where she drowned. In a criminal proceeding concerning the incident, Gearheart pleaded guilty to involuntary manslaughter. Acting as co-personal representatives of Brandy’s estate, her parents, Jon Harvey and Misty Johnson, filed a wrongful death action against Gearheart in an Indiana trial court. They contended in their complaint that Gearheart’s “negligence and recklessness” had caused Brandy’s death. Harvey and Johnson also named Auto-Owners Insurance Co. as a defendant on the theory that because of the liability insurance portion of a homeowners’ insurance policy issued to Gearheart’s parents, Auto-Owners would be obligated to pay any judgment entered against Gearheart (who still lived in his parents’ home and was therefore an insured person under the policy). The court concluded that the record showed a plea agreement, but the evidence “is definitely not so overwhelming as to mandate us to conclude that Gearheart must have intended to harm Brandy. Because Auto-Owners has failed to demonstrate the absence of a genuine issue of material fact regarding Gearheart’s intent to harm Brandy, the trial court was correct to deny summary judgment on Auto-Owners’ claimed application of the coverage exclusion. [We therefore conclude that the Court of Appeals erred in reversing the trial court’s decision.]”
The hyperlink is to the Seventh Circuit’s opinion on the Findlaw.com website.
The Vining case furnishes an example of behavior that triggers bad faith liability. In late May 1993, Milford suffered a heart attack and died. His surviving spouse, Billie Vining (Vining), filed a claim with Enterprise for death benefits of approximately $10,000 under Milfordís credit life policy. Enterprise refused to pay the claim and rescinded the policy on the supposed ground that Milford had misrepresented his health history in his application for the credit life policy. After unsuccessfully contesting the rescission, Vining sued Enterprise for breach of contract and for rescinding the policy in bad faith. In defense, Enterprise maintained that it had a legitimate basis for contesting the claim and that Milford had made material misrepresentations in his application for the credit life policy. Vining presented evidence designed to show that Enterprise routinely rescinded credit life policies after insureds’ deaths and that the rescission of Milford’s policy fit into this pattern. The jury returned a verdict in Vining’s favor, awarding her $400,000 in compensatory damages for financial losses, emotional distress, and related harms. In addition, the jury assessed $400,000 in punitive damages against Enterprise, which appealed to the U.S. Court of Appeals for the Tenth Circuit. On appeal, the court affirmed.
False. The premium paid by the insured and the promise to pay upon the occurrence of the covered event are the consideration. True. False. Proof of loss refers to a sworn statement by the insured about the loss and resulting damage that is often required by the policy.
False. An i nsurable interest is a legal or equitable interest in the property that translates into an economic stake at the time of the loss and since Paul owns the house, he has an insurable interest. True. False. Insurers tend to either (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
The correct answer is (b).
The correct answer is (b). An increase of hazard clause states that the insurer’s liability will be terminated if the insured takes action materially increasing insurer’s risk .
Opportunity to discuss the conflicting interests of (a) insurers, (b) property owners, renters, and business owners, and (c) government entities after a natural disaster. The photo is of a neighborhood in New Orleans after Hurricane Katrina in 2005.