Insurance Law
Travis
Spring 2001
Function of Insurance
- Risk Transfer (transfer risk to Ins. Co.)
- Risk Pooling (centralize the risk)
- Risk Allocation (set price proportionate to the amount of risk)
Adverse Selection
Sick people buy insurance, health people do not
Moral Hazard
Insured may cause loss
Insured may not prevent loss
The tendency of any insured party to exercise less care to avoid an insured loss than would be exercised if the loss were not insured
Breach of Warranty
Agent’s knowledge is Ins. Co.’s knowledge
Ins. Co. is bound by the knowledge of its agent
Ins. Co. has the right to ask questions
Material Misrepresentation – Had the Ins. Co. had the accurate info., would they have offered the same coverage at all, or at the same premium? (Cause of the loss doesn’t have to relate to the material misrepresentation.)
Material Misrepresentation
1)Must be Material
2)Must have intent to deceive
In OK – misrepresentation is not a defense unless
1)Fraudulent
2)Material, or
3)Insurance Co. would not have issued the policy or not for that amount
Concealment
Minority – Applicant had a duty to reveal info. he knew was material, even if Ins. Co. didn’t ask, but Insured knew health had changed.
Concealment may be a material misrep.
Insurance Contract Information
Ambiguity
Conflicting provisions in the K – Ambiguity construed against the Ins. Co.
Two permissible constructions -- Ambiguity construed against the Ins. Co.
Reasonable Expectations of Insured
OK rule – If the policy has one of the following then interpretation will be in favor of coverage:
1)Policy is ambiguous
2)Language is buried in K
3)Language is technical
Agent’s Authority
OK – Deeming statute makes brokers the agent of the Ins. Co.
Apparent Authority binds the Ins. Co. even if not named to the insured
Agent must have actual authority in order to not be liable on an indemnity suit by Ins. Co.
Agent represents the Insurance Co. (knowledge of Agent = Ins. Co. knowledge)
Brokers represent Insured
Waiver by Estoppel
Waiver is a voluntary relinquishment of a known right
Estoppel is conduct making it inequitable for Ins. Co. to take a position where insured relied and changed his position base on Ins. Co. contrary position.
Majority rule – cannot create coverage through estoppel or waiver, that was not already in policy from the beginning, but this rule violated all the time by the courts.
These doctrines can negate defenses
Minority rule – conduct which occurs before or at the inception of the policy can generate an estoppel, but conduct later cannot due so.
OK – If a party leads one to believe that he will not insist on the literal performance of a contract term & the party relies thereon, the 1st party will be estopped from demanding literal compliance.
Estoppel by silence – If you don’t speak when you ought to, you shall not speak when you want.
Public Policy
Limited coverage for intentional wrongs. Public policy against rewarding a tortfeasor
Coverage of punitive damages limited, does it serve as a deterrent?
OK – punitive coverage for vicarious liability only
Agent or EE covered
May have a blameless ER, so he can unsure only this type of liability
Policy provisions requiring medical decisions contrary to good medicine violates public policy.
Fire and Property Insurance
Policy Parts
Declarations page
Jacket (printed provisions of the policy)
Endorsements (General Insurance with provisions of a particular state)
All Risk Coverage – covers all risks not excluded (most common)
Specified Risk Coverage – covers only named risk.
Insurable Risk
Relationship b/n the Insured and property must be lawful to create an economic interest
GFP or stolen property has insurable interest
Reasons for insurable risk
1)Don’t want people to cause a loss to occur
2)Don’t want people to profit from losses
3)“Make whole” rule
4)Want indemnity (a sum of money paid in compensation for loss or injury), not windfall
Test for insurable interest
1)Legal or Equitable Interest
2)Factual Expectation
Time when Insurable interest must exist
1)Property insurance – time of loss
2)Life Insurance – inception of coverage
Subrogation
1st party steps into the shoes of 2nd party and assumes 2nd parties rights and responsibilities against 3rd party
Advance release does not destroy coverage
If you release the tortfeasor after loss has occurred, then the Ins. Co. doesn’t have to pay you.
Functions of Subrogation
1)Fosters immunity principle
2)Avoids windfall
3)Holds down premiums
Collateral sources rule – Keeps loss on the wrongdoer, wont allow the wrongdoer to say Ins. Co. has paid.
Subrogation does the same and avoids the windfall
Limited Interest (Mortgages)
Ins. Co. which doesn’t owe insured will pay mortgagee & subrogate against insured
Loss payable clauses – pays come hell or high water
Ins. Co. will have to pay the bank as long as bank doesn’t violate the coverage.
Open mortgage clause – Ins. Co owes loss to payee only if it owes the insured
Innocent co-insured is barred in OK
W barred by H’s arson where property jointly owned & both were co-insured
Majority – innocent spouse may recover
Rebuild or pay mortgage (no clear rule in OK)
May rebuild or pay off mortgage with insurance proceeds
Majority – Bank may force you to pay the mortgage
(Leaseholds)
Landlord cannot recover from tenant for negligence (OK rule)
LL’s Ins. Co. barred from subrogation against the tenant
LL and T are coinsured (implied)
Can’t subrogate against policy holder
(Real Estate Sales)
When to determine loss?
Look to time of transaction (whole transaction; some look to time of loss (fire))
Who has risk of loss? Majority rule – purchaser
On vendor until legal or equitable title passes
On Purchaser after legal or equitable title passes.
(Other Limited Interests)
Life tenant gets full value of the property
Look to the time of the fire to determine loss
A person may have LE for minutes after fire but before death(estate must be paid)
Property insurances on bailed property does not require negligence to afford coverage
Bailed property – property in hands of someone else
Bailment – Turning property over
Bailee liable absent proof that the property was destroyed other than by fault
Show bailment & burden shifts to bailee
Exclusions and Exceptions
Concurrent causation is a jury question
Loss from a mudslide & water (both excluded) caused by explosion (covered) will most likely be covered
When a covered occurrence (cause) joins with an exclusion to bring about a loss it will be covered.
Increased Risk
Increase of risk by a non-management EE does not bar coverage
Temporary absence from property does not trigger “vacant or unoccupied” exclusion
Measure of Recovery
Actual Cash Value determined by:
1)Market value – price a willing buyer would pay willing seller
2)Replacement Cost Less Depreciation – Advantage of relative definiteness; may result in excess recovery
3)Broad Evidence Rule – Requires Fact finder to consider all evidence an expert would consider relevant to an evaluation. Particularly FMV & RC-Deprec. Just guidelines
Appraisals (not used much in OK)
1)Each side gets an appraiser and if they can’t agree get an umpire
2)Never demand an appraiser on a personal loss
3)Party demanding an appraiser is bound by the result and waives his right to a jury trial under OK law. (Ins. Co. will never demand and appraiser)
Coinsurance reduces recovery on partial losses to the extent the property is underinsured.
Business Interruption Insurance
Policy requirement to use the surplus property to continue production applies only to the insured property
Valued Policy – Agree ahead of time that insurance company will pay certain amount (per diem) upon loss
Life, Health and Disability Insurance
Life Insurance
Term – death benefit (no cash value)
Whole – cash and loan value
The Application
Ambiguous terms favor the insured resulting in coverage
Binding receipt – Ins. Co. keeps premiums if no loss; rejects if there is a loss
Pay the Ins. Co. 1st, then the Ins. Co. underwrites to determine if they want to insure. If the person dies during this time, they deny coverage and return the premiums. If everything checks out they will accept.
Insurable Interest
Exists when the beneficiary expects some benefits from the continuance of the life of the insured. (ties to blood or marriage)
Only Ins. Co. has standing to raise issue of insurable interest
If policy voided by insured, Ins. Co. doesn’t pay at all
Usually wont look to insurable interest cases except creditor cases
Recovery is limited to debt
Insured must consent to coverage b/c of policy regarding encouragement of murder
Change of Beneficiary or Assignment
OK – divorce decree will change beneficiary
Divorce revokes beneficiary designation
Assignment -- must be in writing in accordance with policy
Purpose of formality of change:
1)Be sure proceeds go as insured intended
2)Protect Ins. Co. from lawsuits
Private Insurance Rule – change of beneficiary effective if insured did all that could be expected (intent considered)
Government Insurance Rule – Strict Compliance required (no intent)
Assignment by policyholder to one with no insurable interest is okay.
Policy against encouraging murder less present here
Limitations on Recovery by Beneficiaries
No coverage where the policy is a scheme to murder the insured
Negligence cases – individual sues the Ins. Co. for negligent issuance of policy
Beneficiary who kills insured cannot recover, whether convicted or not
In civil case, non-beneficiary has burden of proof by preponderance of evidence (plaintiff has due process right to assert their position)
OK – in the event the primary beneficiary is excluded by “slayer statute”, the contingent beneficiary, rather than heirs, takes even though the statute says proceeds go by descent & distribution & policy says contingent beneficiary takes only when primary beneficiary dies.
Incontestability
Policy becomes incontestable 2 yrs after it is taken out.
Eligibility for group membership is within the incontestability clause.
Clause keeps insured from having to prove accuracy of information years afterward
Applies even when insured receives policy even through misrepresentation
If there is an issue that the Ins. Co. could have reasonably found out through investigation, the incontestability clause will apply (if not reasonable, then the clause will not apply)
Pre-existing conditions are not within the incontestability clause
OK – health insurance incontestable after 2 years, except for fraud
Limitations on Risk
Predisposition to injury is not a disease or injury
Daredevil behavior does not exclude accident coverage
It is an accident b/c the insured did not intend to die
Exception – being killed while committing a crime
Life Insurance – if insured proves death, Ins. Co. must prove defense.
Accidental Death – Insured has the burden to prove that it was accidental
Suicide bars recovery under the “sane or insane” clause, regardless of sanity
Negligence Actions Against Insurance Co.
Ins. Co. owes a duty to exercise ordinary care in handling the application
Ins. Co. owes a duty to exercise ordinary care in handling a beneficiary change
Ins. Co. may be liable, but insured must show proximate cause
Health Insurance
Preexisting Condition
No ERISA requirement to continue coverage for illness already contracted
Problem – company can alter insurance b/c EE contracted deadly disease. EE’s don’t know and would get private insurance if they did.
ERISA:
1)Preemption – Federal Law replaces state law
2)Saving – self insurance law is not preempted
3)Deeming – Self insurance plan “deemed” not to be insurance
Medically Necessary Services
Ins. Co. won’t cover unless treatment accepted in the medical practice
Cases of clear medical research will not be covered
Coordination of Coverage
Ins. Co. must pay proportionate share of recovery cost
Subrogation is equitable doctrine
Majority – Ins. Co. can’t subrogate more than it pays out
Minority – Ins. Co. entitled to full subrogation even if insured takes less than full payment
Amount you settle case for is the amount the injury is worth
Watch out for conflict of interest with regards to subrogation of Ins. Co. & representation of client
Options:
1)Ins. Co. gets paid 1st
2)Pro-Rata (if insured gets 50 cents on the dollar, Ins. Co. must do the same)
3)Make whole rule (OK and Majority) – No recovery by Ins. Co. if insured is not fully compensated. Make whole will apply unless ERISA says “no.”
Disability
Conduct clause that insured is not disabled if he works does not bar coverage if the insured is forced to take work because the Ins. Co. cuts him off
Occupational Disability – can’t do work in the same job as before (reasonably expected to participate due to training, education, and experience)
General Disability -- Any job that he has education or training for
Regular care attendance of physician clause does not require insured to submit to recommended surgery
Requirements may be evidentiary only (to prevent fraud)
Coordination of benefits provision is okay, but courts will examine closely
Clauses will not be enforced if they are misleading or if they render the policy as a whole without substantial economic value
Liability for Bad Faith Breach
Michigan does not recognize tort of Bad Faith action (K action only), so no recovery for emotional distress and no punitive damages
Can only recover under K law.
Must be personal K and not commercial
OK recognizes tort of Bad Faith Claim against the Ins. Co.
Can recover actual damages, for IIED, and punitive(b/c it is tort action)
OK – Bad faith = absence of Good Faith; tort COA w/ SOL 2 years (K SOL = 5 yrs)
1st Party Bad Faith – Insured claiming against his own Ins. Co. for failing to pay a claim to the insured
3rd Party Bad Faith – Insured sues own Ins. Co. for failing to pay /settle a claim 3rd party made against insured (not a “per se” rule – OK law requires “substantial possibility” of excess judgment for liability)
3rd Party claimant under liability policy has no claim against the tortfeasor’s Ins. Co.
3rd Party – Injured Party (no relationship w/ Ins. Co.)
3rd Party has no standing to sue Ins. Co. b/c they are not party to the K
ERISA preempts state bad faith law (no bad faith recovery)
ERISA remedies are exclusive
ERISA permits beneficiary to sue but not to win
ERISA permits attny fee recovery
OK – perhaps allow bad faith under ERISA
OK – Statute – any claim for breach not arising out of K allows punitive damages
Punitives:
1)By C&C evidence that Ins. Co. recklessly disregarded duty to deal fairly and in good faith. Cap is lesser of actual damages or $100,000
2)By C&C that Ins. Co. intentionally and with malice breached good faith duty. Cap is lesser of twice actual damages or $500,000. Jury must make finding in a separate proceeding. (after liability and actual damages) Amount reduced by the court by amount of earlier punitive awards
3)By C&C that Ins. Co. intentionally and with malice breached good faith duty and Beyond Reasonable Doubt Ins. Co. acted intentionally and with malice engaged in life threatening conduct.
Liability Insurance
General Personal Liability coverage in the homeowners policy covers you if you are liable. (Doesn’t matter if you are home or not)
Insuring Agreement
Pay sums for which insured becomes legally obligated to pay as damages b/c of bodily injury or property damage caused by an “occurrence”
Not always certain what will be considered damages
CERCLA forms of relief
1)Administrative (Department of Environmental Quality must clean up property)
2)Injunction (to force clean up)
3)Court Action to recover clean up costs
The Number of Occurrences
OK adopts “cause” analysis for determining the number of occurrences
Courts will look to cause, rather than effect
Majority follows this rule
Insured wants multiple occurrences to get more coverage
Ins. Co. wants multiple occurrences to trigger more deductibles
Multiple coverages may also trigger multiple deductibles
Ins. Co.’s are not sure what the court is going to say do, so they developed aggregate limit. Ex: 1 million per occurrence & 1 million per year (annual aggregate) in an effort by Ins. Co.’s to protect against multiple occurrences.
Can’t exceed the aggregate, no matter how many claims (occurrences)
Exclusions & Conditions
Public policy prevents coverage of minor insured’s intentional wrong, but not of parent’s negligent liability for not preventing minor’s intentional wrong.
Parents must do intentional wrong
OK – where insured hit brother in law over head with crowbar, thinking he was a burglar, intentional act did not bar coverage
Intent to harm burglar, not brother in law
At some point it becomes certain that injury will occur and no objective intent is needed
Intentional act may be implied
Ex: sexual assault; “bumping” car at 100 mph
Business Risk Exclusion – precludes coverage for defects in work done or products supplied
1)Business has an inherent risk that work will not be satisfactory
2)You can’t insure against that
3)You insure against injuring persons or property if your defective work causes that injury.
4)Ambiguity rule – Does it effect the business risk exclusion?
5)Argument that it does – When you provide an exception to an exclusion, the exception applies to the other exclusions as well (not just specific)
6)K exclusion “except for property damage or bodily injury” based on theory of breach of warranty (implied warranty of merchantability, fitness for particular purpose, etc..)
7)Coverage does not apply to K, except contractual (warranty) basis for recovery for property damage and bodily injury
8)OK – not covered = replacement or repair work for defective goods/service
Covered = Damage while replacing faulty stuff put on by insured’s contractor
Notice Conditions
1)Reasonable notice will vary circumstance
2)As soon as practical if flexible
3)OK has Deeming Statute
- In any dispute, agent is deemed to be agent of Ins. Co. not insured
- Knowledge of agent is knowledge of Ins. Co.
4)Prejudiced Ins. Co. must show prejudice in defending against coverage as well as in defending the merits of the claim
- Prejudice – Materially impairs Ins. Co.’s ability to contest its liability to insured
- Is Ins. Co. prejudiced by late notice? May be a defense if Ins. Co. can prove. Ins. Co. must show in all states except N.Y.
Claims Made Coverage