INSURANCE LAW OUTLINE
I.Introduction.
A.The Nature and Function of Insurance.
1.Insurance law is primarily controlled by state law, and is considered consumer law.
2.The law in the area is primarily designed to protect the policyholder, not the companies.
3.Choice of law and of court is very important to the outcome of cases.
4.Since this is state law, there can be many different interpretations of the same thing.
5.Two main problems with insurance:
a)Adverse Selection – those who buy insurance are the ones who need it and will use it.
b)Moral Hazard – those with insurance may be less careful, or even commit crimes to get insurance payments.
6.Ways to combat this:
a)Deductibles – put some risk back on the policyholder.
b)Experience Rating – premium is based on the past history of the customer.
c)Retrospective Premiums – charge more if the claims go over a certain amount.
d)Coinsurance -policyholder pays a percentage of any loss.
7.Insurance Policies usually have three parts:
a)Coverage Grant.
b)Exclusions – stuff not covered.
c)Conditions .
B.The Problem of Imperfect Information.
1.Breach of Warranty.
a)Warranties were statements in policies that had to be literally true, or else there was no coverage.
b)Vlastos v. Sumimoto Marine & Fire – massage parlor building had a warranty that the third floor was used as a janitor’s residence.
i.The language was determined to be ambiguous, and ambiguous language is always construed in the favor of the policyholder.
c)Warranties can easily be abused, and have largely been abandoned.
d)These have been replaced by coverage provisions, which are included and based on the insurer, not the policyholder.
i.Warranty = “policyholder warrants that the third floor used as a residence.”
ii.Coverage Provision = “no coverage unless third floor is used as a residence.”
2.Misrepresentation and Concealment.
a)These arise because of the questions that the policyholder must answer on the insurance application.
b)Misrepresentation.
i.False or misleading statement.
ii.The subject matter is material to the risk.
]Something that increases the risk.
]Something that contributed to the loss.
iii.Insurer has to reasonably rely on the misstatement.
]States vary as to whether this is a subjective or objective standard.
]PA and some other states also require that there be intent to deceive.
c)Concealment.
i.Nondisclosure.
ii.Knowledge that the information is material or important.
iii.Specific intent to conceal.
d)Ward v. Durham Life – policyholder answered questions honestly but his agent cousin didn’t put them on the form.
i.The knowledge of an agent is assumed to be the knowledge of the insurer.
ii.A jury could reasonably find that there wasn’t actually misrepresentation.
iii.Evidence of collusion with the agent will change this rule, however.
e)Waxse v. Reserve Life – a HIV positive man did not mention that fact on an insurance application because he did not feel that the questions were directly asking for that fact.
i.The insurer must ask specific questions if it wants specific answers.
ii.The applicant is not required to volunteer information.
iii.Some states now limit or regulate the ability of insurers to
i.The endorsements read independently were all clear.
ii.The insured gets the benefit of the interpretation, so the limit is $1.675M.
iii.The result of a construction against the insurer cannot exceed the reasonable expectations of the insured.
d)Vargas v. Insurance Co. of North America – the question was whether an airplane crash near Puerto Rico was “within” the United States.
i.The New York court says that the insurer has to show:
]That it would be unreasonable for the average man reading the policy to construe it as the insured does.
]That the insurer’s construction is the only one that can be fairly placed on the policy.
3.Honoring the Reasonable Expectations of the Parties.
a)About 20 states have adopted this principle.
b)This has been applied in two forms, a subjective and objective interpretation.
c)This doctrine serves to invalidate unambiguous policy language that is against the reasonable expectations of the insured.
d)PA does follow this doctrine.
e)Atwood v. Hartford Accident & Indemnity Co. – an electrician that screwed up a thermostat which led to the death of a child was not covered under the “completed operations” exception.
i.The exception was buried in boilerplate, and the definitions necessary to understand it were in several other sections.
