27-1 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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5• Personal Property and Bailments

• Real Property• Landlord and Tenant

• Estates and Trusts• Insurance Law

Property

PART

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Insurance Law

PA ET RHC 27If anything can go wrong, it will.

Anonymous (1950s)known as Murphy’s Law

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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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• 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)

Overview

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• 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

Specifics of Insurance

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• 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

Specifics of Insurance

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• 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

Specifics of Insurance

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• 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

Misrepresentation

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• 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

• 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

Proof of Loss & Time Limits

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• 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

Insurer’s Performance & Breach

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• 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

The Insurable Interest

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• 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

Covered & Excluded Perils

Volcano damage is rarely covered

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• 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

Personal Property Insurance

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• 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)

Indemnity Contracts

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• If real property insured under a valued policy is destroyed, insured recovers face amount of policy regardless of fair market value

• Except for the valued policy, property insurance policies often contain a pro rata clause that apportions loss among insuraners if insured had multiple insurance policies

• An increase of hazard clause states that the insurer’s liability will be terminated if insured takes action materially increasing risk

Special Issues

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• 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

• 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

Special Issues

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• 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

Liability Insurance

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• Liability policies generally protect against insured’s liability for negligence but do not cover deliberate wrongful acts

• 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

Liability Insurance

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• 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

Insurer’s Obligations

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• 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

Insurer’s Obligations

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• 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.

Insurer’s Obligations

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Thought Question• How should insurance claims be

handled in major natural disasters? Aerial view of flooding caused by Hurricane

Katrina