INSURANCE LAW Presented by Rebecca.Wang

1. INSURANCE LAW Presented by Rebecca.Wang Civil&Commercial Law School

2. Contents of Discussion • A. THE INSURANCE CONTRACT 1. The Parties 2. Insurable Interest 3. The Contract 4. Antilapse and Cancellation Statutes and Provisions 5. Modification of Contract

3. 6. Interpretation of Contract • 7. Burden of Proof • 8. Insurer Bad Faith • 9. Time Limitation on Insured • 10. Subrogation of Insurer

4. B. KINDS OF INSURANCE • 11. Business Liability Insurance • 12. Life Insurance • 13. Automobile Insurance • 14. Fire and Homeowners Insurance • 15. Marine Insurance

5. Targets of Discussion • 1. Define insurable interest; • 2. Compare contracts of insurance with ordinary contracts; • 3. Explain the purpose of business liability insurance, marine insurance, fire and homeowners insurance, automobile insurance , and life insurance; and • 4. Explain the effect of an incontestability clause

6. A. THE INSURANCE CONTRACT • Insurance is a contract by which one party for a stipulated consideration promises to pay another party a sum of money on the destruction of, loss of, or injury to something in which the other party has an interest or to indemnify that party for any loss or liability to which that party is subjected.

7. 1. The Parties • The promisor in an insurance contract is called the insurer or underwriter. The person to whom the promise is made is the insured, the assured, or the policyholder. The promise of the insurer is generally set forth in a written contract called a policy.

8. Insurance contracts are ordinarily made through an agent or broker. The insurance agent is an agent of the insurance company, generally working exclusively for one company. For the most part, the ordinary rules of agency law govern the dealings between this agent and the applicant for insurance.

9. An insurance broker is generally an independent contractor who is not employed by any one insurance company. When a broker obtains a policy for a customer, the broker is the agent of the customer for the purpose of that transaction. Under some statutes, the broker is make an agent of the insurer with respect to transmitting the applicant’s payments to the insurer.

10. 2. Insurable Interest • A person obtaining insurance must have an insurable interest in the subject matter insured. If not, the insurance contract cannot be enforced. • (a) Insurable Interest in Property • A person has an insurable interest in property whenever the destruction of the property will cause a direct pecuniary loss

11. to that person. It is immaterial whether the insured is the owner of the legal or equitable title, a lien holder, or merely a person in possession of the property. For example, Vin Harrington, a builder, maintained fire insurance on a building he was remodeling under a contract with its owner, Chestnut Hill Properties. The building was destroyed by fire before

12. Renovations were completed. Harrington had an insurable interest in the property to the extent of the amount owed him under the renovation contract. • To collect on property insurance, the insured must have an insurable interest at the time the loss occurs.

13. Case Summary • FACTS: While Dorothy and James Morgan were still married, Dorothy purchased insurance on their home from American Security Insurance Co. The policy was issued on November 3, 1981, listing the “insured” as Dorothy L. Morgan. Shortly thereafter the Morgans entered into a seperation agreement under which Dorothy deeded her interest in the house to James.

14. The Morgans were divorced on August 26, 1982. On Novermber 28, 1982, the house was destroyed by fire. American Security refused to pay on the policy, claiming that Dorothy had no insurable interest in the property at the time of the loss. The Morgans sued the insurer, contending that they were entitled to payment under the policy issued to Dorothy.

15. (b) Insurable Interest in Life • A person who obtains life insurance can name anyone as beneficiary regardless of whether that beneficiary has an insurable interest in the life of the insured. A beneficiary who obtains a policy, however, must have an insurable interest in the life of the insured. Such an interest exists if the beneficiary can reasonably expect to receive pecuniary gain from the continued

16. Life of the other person and, conversely, would suffer financial loss from the latter’s death. Thus, a creditor has an insurable interest in the life of the debtor because he or she may not be paid the amount owed upon the death of the debtor. • A partner or partnership has an insurable interest in the life of each of the partners because the death of any one of them will dissolve the firm and cause some degree f loss to the partnership. A business enterprise has an insurable interest in the

17. Life of an executive or a key employee because that person’s death would inflict a financial loss on the business to the extent that a replacement might not be readily available or could not be found. • In the case of life insurance, the insurable interest must exist at the time the policy is obtained. It is immaterial that the interest no longer exists when the loss is actually sustained. Thus, the fact that a husband (insured) and wife (beneficiary) are divorced after the life insurance policy was

18. Procured does not affect the validity of the policy is obtained by one partner on another does not invalidate the policy.

19. Case Summary • Facts: Jewell Norred’s husband James Norred was the business partner of Clyde Craves for ten years. On May 7, 1979, Graves and Norred took out life insurance policies, with Graves being the beneficiary of Norred’s policy and Norred being the beneficiary of Graves’s policy. Premiums were paid out of partnership funds. On February 28, 1983, Graves and Norred

20. Divided the partnership assets, but they did not perform the customary steps of dissolving and winding up the partnership. Graves became the sole owner of the business and continued to pay the premiums on both insurance policies until James Norred died on December 5, 1983. Jewell Norred sued Graves, seeking the proceeds of the insurance policy for herself, alleging that Graves had no insurable interest in the life of James Norred at the time of his death. From a judgment on

21. Behalf of the estate, Graves appealed.

22. 3. The Contract • The formation of a contract of insurance is governed by the general principles applicable to contracts. By statute, it is now commonly provided that an insurance policy must be written. To avoid deception, many statutes also specify the content of certain policies, in whole or in part. Some statutes specify the size and style of type to be used in printing the policies. Provisions

23. In a policy that conflict with statutory requirements are generally void. Frequently, a question arises as to whether advertising material, estimates, and statistical projections constitute a part of the contract. • (a) The Application as Part of the Contract. • The application for insurance is generally attached to the policy when issued and is made part of the contract of insurance by express stipulation of the policy.

24. The insured is bound by all statements in the attached application if the policy and the attached application are retained without objection to such statement. • (b) Statutory Provisions as Part of the Contract. • When a statute requires that insurance contracts contain certain provisions or cover certain specified losses, a contract of insurance that does not comply with the statute will be interpreted as though it contained all the provisions required by

25. the statute. When a statute requires that all terms of the insurance contract be included in the written contract, the insurer cannot claim that a provision not stated in the written contract was binding on the insured.

26. CASE SUMMRY • FACTS: In 1975, Edwin Domke submitted an application for mortgage disability insurance, under an employer group insurance plan, to cover his house. On his application, he set forth his medical history and indicated that he had a hearing impairment. Domke was issued a four-page

27. Certificate of insurance, but he was not given a copy of the group master policy, which excluded from coverage “preexisting conditions.” A state law required that each certificate of insurance set forth “ any exceptions, limitations and restrictions.” In 1977, Domke resigned his employment because of his hearing problem and applied for benefits under the mortgage disability policy. The insurance company denied benefits because the master policy excluded coverage for preexisting

28. Conditions and his hearing impairment was a preexisting condition.

29. Antilapse and Cancellation Statutes and Provisions • If the premiums are not paid on time, the policy under ordinary contract law would lapse because of nonpayment. However, with life insurance policies, by either policy provision or statute, in insured is allowed a grace period of 30 or 31 days in which to make payment of the premium due. When there is a default in the payment of a premium by the insured, the insurer may be

30. Required by statute to (1) issue a paid-up policy in a smaller amount, (2) provide extended insurance for a period of time, or (3) pay the cash surrender value of the policy. • The contract of insurance may expressly declare that it may or may not be canceled by the insurer’s unilateral act. By statute or policy provision, the insurer is commonly required to give a specific number of days’ written notice of cancellation.

31. 5. Modification of Contract • As is the case with most contract, a contract of insurance can be modified if both insurer and insured agree to the change. The insurer cannot modify the contract without the consent of the insured when the right to do so is not reserved in the insurance contract.

32. To make changes or corrections to the policy, it is not necessary to issue a new policy. An endorsement on the policy or the execution of a separate rider is effective for the purpose of changing the policy. When a provision of an endorsement conflicts with a provision of the policy, the endorsement controls because it is the later document.

33. Interpretation of Contract • A contract of insurance is interpreted by the same rules that govern the interpretation of ordinary contract. Words are to be given their ordinary meaning and interpreted in light of the nature of the coverage intended. Thus, an employee who has been killed is not regarded as disabled within the meaning of a group policy covering employees.

34. The courts are increasingly recognizing the fact that most persons obtaining insurance are not specially trained. Therefore, the contract of insurance is to be read as it would be understood by the average person or by the average person in business rather than by one with technical knowledge of the law or of insurance. • If there is an ambiguity in the policy, the provision is interpreted against the insurer.

35. CASE SUMMARY • R.F. Baurer purchased a White Freightliner tractor and agreed to haul Baurer’s hay and cattle, thus saving Baurer approximately $30,000 per year. Baurer insured the vehicle with Mountain West Farm Bureau Insurance Co. The policy contained an exclusionary clause that provided:” We don’t insure your [truck] while it is rented or leased to others…..This does not apply to

36. The use the truck on a share expense basis. “ When the vehicle was destroyed, Mountain West refused to pay on the policy. Mountain West contended that the arrangement between Baurer and Britton was a lease of the vehicle, which was excluded under the policy. Baurer sued, contending that it was a “ share expense basis” allowed under the policy.

37. Burden of Proof • When an insurance claim is disputed by the insurer, the person bringing suit has the burden of proving that there was a loss, that it occurred while the policy was in force, and that the loss was a kind that was within the coverage or scope of the policy. • A policy will contain exceptions to the coverage. This means that the policy is not

38. Applicable when an exception applies to the situation. Exceptions to coverage are generally strictly interpreted against the insurer. The insurer has the burden of proving that the facts were such that there was no coverage because an exception applied. Although an exception is literally applicable, it will be ignored by some courts and coverage sustained if there is no cause-and effect relationship between the loss and the conduct that was the violation of the exception.

39. Insurer Bad Faith • As is required in the case of all contracts, an insurer must act in good faith in processing and paying claims under its policy. In some states, laws have been enacted making an insurer liable for a statutory penalty and attorney fees in case of a bad faith failure or delay in paying a valid claim within a specified period of time.

40. A bad-faith refusal is generally considered to be any frivolous or unfounded refusal to comply with the demand of a policyholder to pay according to the policy. • When it is a liability insurer’s duty to defend the insured and the insurer wrongfully refuses to do so, the insurer is guilty of breach of contract and is liable for all consequential damages resulting from the breach. In some jurisdictions, an insured can recover for an excess judgment rendered against the insured when it is

41. Proven that the insurer was guilty of negligence or bad faith in failing to defend the action or settle the matter within policy limits. • If there is a reasonable basis for the insurer’s belief that a claim is not covered by its policy, its refusal to pay the claim does not subject it to liability for a breach of good faith or for a statutory penalty. This is so even though the court holds that the insurer is liable for the claim.

42. For example, the following illustrates an insurer’s bad-faith failure to pay a claim, as opposed to an insurer’s reasonable basis for failure to pay. Carmela Garza’s home and possessions were destroyed in a fire set by an arsonist on August 19, 1990. Carmela’s husband, Raul, who was no longer living at the home, had a criminal record. An investigator for the insurer stated that while he had no specific information to implicate the Garzas in the arson, Carmela may have wanted

43. the proceeds to finance relocation to another city. By October of 1990, however, Aetna’s investigators ruled out the possibility that Garza had the motive or the opportunity to set the fire. The insurer thus no longer had a reasonable basis to refuse to pay the claim after this date. Yet it took over a year and a half and court intervention for Anetna to allow Carmela to see a copy of her policy, which had been destroyed in the fire. Two years after the

44. Fire, Aetna paid only $28,624.55 for structural damage to the fire-gutted home, which was insured for $111,000. The court held that Aetna’s actions constituted a bad-faith failure to pay by the insurer.

45. Time Limitations on Insured • The insured must comply with a number of time limitations in making a claim. For example, the insured must promptly notify the insurer of any claim that may arise, submit a proof-of-loss statement within the time set forth in the policy, and bring any court action based on the policy within a specified time period.

46. B. Kinds of Insurance • Businesses today have specialized risk managers who identify the risks to which individual businesses are exposed, measure those risks, and purchase insurance to cover those risks (or decide to self-insure in whole or in part). • Insurance policies can be grouped into certain categories. Five major categories of insurance are considered below:

47. (1)business liability insurance • (2)marine and inland marine insurance • (3)fire and home owners insurance • (4)automobile insurance • (5) life insurance

48. 11. Business Liability Insurance • Business may purchase “ comprehensive General Liability” (CGL) policies. This insurance is a broad, “ all risk” form of insurance providing coverage for all sums that the insured may become legally obligated to pay as damages because of “bodily injury” or “ property damage” caused by an “occurrence.”

49. The insurer is obligated to defend the insured business and pay damages under CGL policies for product liability cases, actions for wrongful termination of employees, sexual harassment cases, damages caused by the business advertising, and trademark infringement suits. The insurer may also be obligated to pay for damages in the form of cleanup costs imposed for contamination of land, water, and air under environmental statutes.

50. Business may purchase policies providing liability insurance for their directors and officers. Manufacturers and sellers may purchase product liability insurance. Professional persons, such as accountants, physicians, lawyers, architects, and engineers, may obtain liability insurance protection against malpractice suits.