1

Insurance LAW

2

Introduction

Insurance is a contractual arrangement for transferring and allocating risk.

Risk. Prediction concerning potential loss based on

known and unknown factors. Risk Management.

Involves the transfer of certain risks from the individual to the insurance company by a contractual agreement.

3

§ 1: Insurance Terminology and Concepts

Insurance Terminology. The Concept of Risk Pooling. Classification of Insurance. Insurable Interest.

4

Insurance Terminology

Policy (Insurance contract). Premium is the consideration to be paid to the

insurer. Underwriter (usually an insurance company). Broker v. Agent.

5

The Concept of Risk Pooling

All insurance companies spread the risk among a large number of people - the pool - to make premiums small in comparison with the coverage offered.

Insurance companies correlate data over a period of time to estimate fairly accurately the total amount they will have to pay if they insure a particular group, as well as the rates they will have to charge each member of the group so they can make the necessary payment and still show a profit.

6

Classification of Insurance

Insurance is classified according to the nature of the risk involved.

See Exhibit 50-1 in textbook for Insurance Classifications.

7

Insurable Interest

A person can insure anything in which he or she has an insurable interest.

Types of insurable interest: Life. Key-Person Life Insurance. Property.

8

Life InsuranceLife Insurance

Anyone who has an insurable interest. Must have a reasonable expectation of benefit

from the continued life of another. Insurable interest must exist at the time the policy

is obtained. Policy remains valid, even after interest no longer

exists (divorce). Key-person insurance -- insurance obtained by an

organization on the life of a person important to that organization.

9

Property InsuranceProperty Insurance

Anyone who has an insurable interest. A person who derives a pecuniary benefit from

the preservation and continued existence of the property.

Insurable interest must exist when the loss occurs.

Case 50.1: Sotelo v. Washington Mutual Insurance Company (1999).

Anyone who has an insurable interest. A person who derives a pecuniary benefit from

the preservation and continued existence of the property.

Insurable interest must exist when the loss occurs.

Case 50.1: Sotelo v. Washington Mutual Insurance Company (1999).

10

§ 2: The Insurance Contract

Governed by the general principles of contract law, and regulated by the state. Application is an offer, which insurance company

can either reject or accept. Acceptance sometimes conditional.

Need consideration. Parties need capacity.

11

The Insurance Contract [2]

Application For Insurance. Effective Date. Provisions and Clauses. Interpreting Provisions of an Insurance

Contract. Cancellation. Basic Duties and Rights. Defenses Against Payment.

12

Application For Insurance

Filled in application attached to the policy and made a part of the contract.

Misstatements or misrepresentation can void a policy, specially if company can show it would not have issued policy if it had known the facts.

13

Effective Date

Broker is agent for the applicant. Agent is agent for the insurance company. He can

issue a binder, if some consideration is paid, which will immediately bind the insurance company, depending on certain conditions being met.

Parties may agree contract will not be effective until policy is issued and delivered or sent to applicant.

Parties may agree policy will be binding, not be effective, until first premium paid, or physical exam passed.

14

Provisions and ClausesProvisions and Clauses

Provisions Mandated by Statute. Incontestability Clauses. Coinsurance Clauses. Appraisal and Arbitration Clauses. Multiple Insurance Coverage. Antilapse Clauses.

15

Provisions Mandated by StatuteProvisions Mandated by Statute

Provisions which are mandated by statute to be included in the insurance policy will be deemed to be in the insurance policy -- whether they are in the policy or not.

Provisions which are mandated by statute to be included in the insurance policy will be deemed to be in the insurance policy -- whether they are in the policy or not.

16

Incontestability Clauses Incontestability Clauses

State statutes sometimes provide that once a life or health insurance policy has been in force for a specified length of time, the insurer cannot contest statements made in the application.

State statutes sometimes provide that once a life or health insurance policy has been in force for a specified length of time, the insurer cannot contest statements made in the application.

17

Coinsurance Clauses

If owner insures her property for at least 80% of its value, owner will be able to recover up to the face value of the policy.

If owner insures for less than 80%, owner will be responsible for a proportionate share of the loss.

Amount of insurance recovery Coinsurance percentage = percentage(80%) x Property value

18

Appraisal and Arbitration ClausesAppraisal and Arbitration Clauses

If insurer and insured cannot agree on value of property, an appraisal can be demanded.

Contract may also provide for arbitration.

If insurer and insured cannot agree on value of property, an appraisal can be demanded.

Contract may also provide for arbitration.

19

Multiple Insurance CoverageMultiple Insurance Coverage

If insured has multiple insurance policies and the amount of coverage exceeds the loss, the insured can collect from each insurer only the company’s proportionate share of the liability, relative to the total amount of insurance.

If insured has multiple insurance policies and the amount of coverage exceeds the loss, the insured can collect from each insurer only the company’s proportionate share of the liability, relative to the total amount of insurance.

20

Anti-lapse Clauses

Policy does not lapse automatically upon nonpayment of premium.

Insured has a grace period of thirty or thirty-one days within which to pay the overdue premium. The insurer may be required to extend the insurance for a

period of time. Insurer may issue a policy with less coverage to reflect the

amount of the payments made. The insurer may pay the insured the cash surrender

value of the policy.

21

Interpreting Provisions of an Insurance ContractInterpreting Provisions of an Insurance Contract

Courts interpret ambiguity against the insurance company.

Uncertainty as to whether policy actually exists is resolved against the insurance company.

Insurer must adequately notify insured of any change in policy under an existing policy.

Courts interpret ambiguity against the insurance company.

Uncertainty as to whether policy actually exists is resolved against the insurance company.

Insurer must adequately notify insured of any change in policy under an existing policy.

22

CancellationCancellation

Insured can cancel policy at any time, and the insurer can cancel according to terms of policy.

Insurer must give written notice of cancellation.

Insured can cancel policy at any time, and the insurer can cancel according to terms of policy.

Insurer must give written notice of cancellation.

23

Basic Duties and RightsBasic Duties and Rights

Insured must act in good faith. Insurer has duty to investigate to determine

the facts. Third party claims: Insurer is obligated to

make reasonable efforts to settle the claim, and policy provides that in this situation insured must cooperate.

Case 50.2: Columbia National Insurance Co. v. Freeman (2002).

Insured must act in good faith. Insurer has duty to investigate to determine

the facts. Third party claims: Insurer is obligated to

make reasonable efforts to settle the claim, and policy provides that in this situation insured must cooperate.

Case 50.2: Columbia National Insurance Co. v. Freeman (2002).

24

Defenses Against PaymentDefenses Against Payment

Insurance company can raise any of the defenses that would be valid in any ordinary action or contract: Fraud, misrepresentation.

Not if information given was optional. Not incorrect statement of age.

Concurrent causation doctrine. Case 50.3: Paul Revere Life Insurance Co. v.

Firma (1997).

Insurance company can raise any of the defenses that would be valid in any ordinary action or contract: Fraud, misrepresentation.

Not if information given was optional. Not incorrect statement of age.

Concurrent causation doctrine. Case 50.3: Paul Revere Life Insurance Co. v.

Firma (1997).

25

§ 3: Types of Insurance§ 3: Types of Insurance

Life Insurance. Fire and Homeowner’s Insurance. Automobile Insurance. Business Liability Insurance.

Life Insurance. Fire and Homeowner’s Insurance. Automobile Insurance. Business Liability Insurance.

26

Life InsuranceLife Insurance

Types of Life Insurance: Whole life. Limited-Payment Life. Term Insurance. Endowment Insurance. Universal Life.

Types of Life Insurance: Whole life. Limited-Payment Life. Term Insurance. Endowment Insurance. Universal Life.

27

Life Insurance [2]

Features of rights and liabilities: Liability. Adjustment Due to Misstatement of Age. Assignment. Creditors’ Rights. Termination.

28

Fire and Homeowner’s Insurance

Standard Fire Insurance Policies: Liability. Proof of Loss. Occupancy Clause.

Homeowner’s Insurance: Assignment Property Coverage. Liability Coverage.

29

Automobile Insurance

Liability Insurance. Collision and Comprehensive Insurance. Other Automobile Insurance.

Uninsured Motorist. Accidental Death Benefits. Medical Payment Coverage. Other-Driver Coverage. No-Fault Insurance.

30

Business Liability Insurance

General Liability. Product Liability. Professional Malpractice. Worker’s Compensation.