Insurance Law

PA ET RHC 27

“If anything can go wrong, it will.”

Anonymous (1950s), known as Murphy’s Law

Learning Objectives

• Insurance policies as contracts

• Property insurance

• Liability insurance

• Bad faith breach of insurance contract

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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– See Property Owners Insurance Co. v. Cope

Specifics of Insurance

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• A binder is an 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

The Insurance Binder

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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

Proof of Loss & Time Limits

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• 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

Specifics of Property Insurance

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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

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Volcano damage is rarely covered

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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• 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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• 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)

Personal Property Insurance

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• 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

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 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

Special Issues

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• 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 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

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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