Insurance Law Outline

Insurance Law Fall 2006
1. Insurance, Law, and Society
I. Risk and Insurance 101
A) Terms
1. Risk – Something that can happen. Ins addresses bad things that can happen.
2. Risk Transfer – A transaction or institutional arrangement that transfers, or shifts, risk from one person or entity to another. Most transactions of all types transfer some kind of risk.
3. Risk Spreading – Occurs whenever an entity takes on risk and parcels it out to a group of people.
4. Risk Aversion – Nearly universal preference for certainty over uncertainty with regard to future losses.
5. The law of large numbers – We can be more certain about the future experience of large groups in the aggregate than we can be about the future experience of any particular individuals in that group. Corollary – ICs protect themselves within this rule through diversification in risk levels within a type of risk and in different risks.
6. Times of rapid legal, tech, or social change place stress on ins institutions.
II. Beyond Risk Spreading – Part One. Three economic problems hinder the ability to spread risk.
A) Moral Hazard. The theoretical tendency for ins to reduce incentives (1) to protect agains loss or (2) to minimize the cost of a loss.
1. ICs could defeat moral hazard by contracting on care – requiring insureds to do, while insured, just what they would do if they weren’t.
2. Another method: community of fate; make the –ed feel some of the pain. One ex: deductibles.
3. Another: design ins Ks so that risks that pose a very high degree of moral hazard are not covered or covered less. ex: those things over which the –ed has the greatest control.
B) Adverse Selection. The theoretical tendency for high-risk people to be more interested in ins than low-risk people.
III. Beyond Risk Spreading – Part Two
IV. (Way) Beyond Risk Spreading – Insurance and Social Responsibility
A) Insurance and Accountability
B) Insurance and Trustworthiness
C) Insurance and Causation
D) Insurance and Freedom
E) Insurance and Solidarity
V. Insurance Law
2. Contract Law Foundations
I. Introduction. Except for social ins and health ins, K law continues to define most aspects of the relationship between insurers and policyholders. The several doctrines below show some of the tools courts use to reform Ks (courts often actually starting with a conclusion).
II. Insurance Contract Interpretation
A) Gaunt v. John Hancock Mut. Life Ins. (look at the approaches of the two judges here)
1. Learned Hand, 2d Cir., 1947
2. –ed paid and K executed but medical OK hadn’t come through yet. –ed dies before final approval of policy. –ed would have been covered – final medical approval was on its way. IC says no coverage.
3. Dist. Ct – Dismiss
4. Cir. Ct – Reverse
5. Ct’s reasoning – While the language of the K, read strictly and technically, precludes coverage, the average person, reading the K colloquially, would certainly walk away from signing the K with the idea that he’s covered. The K is thus ambiguous and contra proferentem applies. (Hand admits he’s pushing the envelope to keep within the formalist approach.) IC loses.
6. Concurrence – (J. Clark) Majority’s opinion, based on interpretation will only encourage litigation about interpretation. The K here really does preclude coverage, but that’s not relevant – it should be held against IC on the basis of its inequity.
7. PC – Such a sweeping fairness analysis risks unhinging the whole idea of ins as a K. There’s no framework; it all really comes back to the reas exp of the parties, with the ct as regulator.
B) World Trade Center Properties v. Travelers Indemnity (same law for interpretation when the players are highly sophisticated and great sums of money as when not?)
1. Martin, S.D.N.Y., 2002
2. WTC lessees and their ICs. Many policies (incl. excess) in effect on 9/11 but none fully written as Ks at that time. Travelers actually issues its policy two days after 9/11; the other companies never do and are to rely on the Willis memo. Travelers had no definition of “occurrence” in their policy at that point. WTC ins broker Willis had circulated a memo that defined occurrence.
3. Cir. Ct. – SJ for WTC folks denied; occurrence is not so unambiguous as to require the ct to ignore extrinsic evidence in its interpretation.
4. P arg – B/c Travelers did not define the term, it bound itself to interpretation of that term as given it in the courts of jurisdiction.
5. D arg – B/c there was no actual fully written K on 9/11, the ct must look to extrinsic evidence in defining and interpreting the term (wants to be tied to the Willis memo’s definition, like the other ICs).
6. Ct’s reasoning – Case law interpretations of the term are dependent on those cases’ facts. It is sufficiently ambiguous to require litigation.
C) C&J Fertilizer v. Allied Mut. Ins. (comports with Clark’s concurrence in Gaunt)
1. Reynoldson, IA SC, 1975
2. Fertilizer business broken into and robbed. Obviously an outside job, but due to the thief’s ability to gain initial entry to the building via a locked door that required no damage to open, there was no damage to the exterior of the building. Policy required same for coverage (as protection against inside jobs).
3. Trial ct – Terms of the K are unambiguous; no coverage.
4. IA SC – The burglary is covered.
5. Court’s reasoning – In the end, ct goes with a reasonable expectations approach. The reasonable expectations of the parties as to this clause went to inside vs. outside jobs. This was obviously an outside job burglary. Ic’s defn here of burglary isn’t common sense. Other doctrines the ct addresses here: Looks to the parties’ intent in interpreting the K. The revolution in prevalence of standard form Ks (Ks of adhesion) requires a shift away from traditional analysis that assumes all parties read and understand K. Fact that this form was approved by ins comm doesn’t change that; it was still drafted by ICs (this is a common way for cts to treat ins comm approval of ins Ks). Llewellyn – the only real assent in these types of Ks is as to the few dickered terms. Implied warranty – that the policy delivered would be reasonably fit for its intended purpose; if it’s good enough for goods, it’s good enough for ins. K was unconscionable b/c P didn’t have the K at time of sale and relevant language was in 6-point font. Unconscionability gets to where even contra proferentem can’t. Ct here treats all of these doctrines favorably in this case.
6. Dissent – Maj’s opinion “ignores virtually every rule by which we have heretofore adjudicated such cases and affords P ex post facto ins coverage which it not only did not buy, but it knew it did not buy.” K language was clear. Don’t try to bring ins Ks in under the UCC.
7. Ct here chooses the doctrine that still allows for the greatest autonomy by parties to a K. REAS EXP IS THE MINORITY RULE as to ins Ks (10 states). Unconscionability comes the closest to Clark.
8. Ct’s doctrines here are functionalist; plain meaning and contra prof are formalist. Ins LIA – ICs take the formalist approach and so do most courts.
9.
III. Waiver and Estoppel. Most common reasons for –eds demanding payment for a claim that wouldn’t otherwise be covered. Other one: go after the IC through its broker (as their agent – need apparent agency). Both doctrines have facilitated court’s support for ins becoming something used by unsophisticated players.
A) Definitions
1. Waiver – where a party voluntarily and unilaterally relinquishes a right. The party must (1) be aware of the right being waived and (2) intend (in the objective sense) to forgo the right.
2. Estoppel – where one party’s acts or representations reasonably induce detrimental reliance on the part of another.
B) Darner Motor Sales v. Universal Underwriters (Feldman, AZ SC, 1984) (estoppel – ct gone too far or not far enough? MINORITY VIEW)
1. Rental car company sues broker. P noticed, upon renewal, that lessees’ coverage is 15/30; he wants 100/300. Ins broker reassures P that umbrella portion of policy will provide that coverage. Car accident; victim recovers. Brokerage won’t provide the higher coverage.
2. Trial ct – SJ for D.
3. App ct – Affirm.
4. AZ SC – Remand (SJ was error).
5. P arg – (alternatives) Estoppel based on agent’s actions; K should be reformed to provide coverage; broker and agent negligent.
6. Ct’s reasoning – The four corners approach doesn’t do justice to modern standard form ins Ks. Use of estoppel in cases like this one is on the rise. It allows the (mis)representations to become a part of the K, departing from the four corners/parol evidence rule. AZ hereby adopts NJ’s approach in allowing equitable estoppel as a means of finding coverage. This is not limited to cases where the policy has not been delivered prior to the loss. Also, reformation may be appropriate here if agent had knowledge of –ed’s unilateral mistake in understanding the policy.
7. Concurrence – Limits this opinion to reasonable expectations, not “impression or imagination” of the consumer.
8. Dissent – This makes the K language irrelevant; ICs can’t calculate their risk under this rule. It’s now down to a swearing contest between the parties. Makes consumer ignorance preferable.
9. Estoppel remains controversial as applied to ins Ks. Some cts reject estoppel to avoid restrictions (exclusions) but allow it to avoid application of conditions.\
10. Detrimental reliance can be a hard thing to prove in ins/estoppel cases. Usually means –ed has to show he would’ve gone with another IC or policy if he’d known.
C) Jenkins v. Indemnity Insurance Co (King, CT SC, 1964) (waiver)
1. Policy issued in NY. Accident in CT. Wife injured and brings action against H (his IC) for injuries. NY law allows the K language that precludes such coverage; Conn law doesn’t. Prior to adjudication of W’s suit, IC agreed to pay. Ct first says NY law applies, so P also argues waiver.
2. Trial ct – For D IC (applying NY law)
3. CT SC – Reverse and remand with instructions (waiver)
4. D arg – It didn’t know of its rights under NY law when it initially said would pay.
5. Court’s reasoning – Waiving party needn’t have absolute knowledge of the right in order to waive it; need only know of the existence of the claim and its reasonably possible legal efficacy. Otherwise, D could always just claim ignorance of the right to avoid waiver. D’s letter to W was a waiver.
IV. The Role of Insurance Intermediaries. If waiver and estoppel don’t work, the ins intermediary is the logical target. Make sure, if you go through a broker, he’s not judgment proof. Strictly, the IC is an ins agent’s principle, while the –ed is an ins broker’s principle. Doctrine of apparent authority can sometimes defeat this dichotomy (i.e. let the –ed get at the IC through a broker).
A) Economy Fire & Cas. v. Basset (Lewis, Ill. App. Ct., 1988) (agent vs. broker)
1. –ed bought HO policy through brokers. She runs a daycare out of the home and a child is injured there. IC claims no coverage for such business activities in the home and is right. Ps go after the broker.
2. Trial Ct – For D broker (he’s not an agent of the IC)
3. App. Ct – Reverse and remand.
4. P arg – Acts and omissions as IC’s agents; negligence.
5. D arg – Even if D was negligent, Ps had policy and could read.
6. Ct’s reasoning – Broker’s agency relationship here was with Ps, not ICs. But, an Ill. ins broker is bound by law to exercise reasonable skill and diligence – it’s a FD under agency law. Broker here knew P was running a daycare and never warned her she wouldn’t be covered. The fact that P had a copy of the policy here and never read/understood it doesn’t preclude a remedy here. (Note – the fact that there’s no coverage is never in dispute here.)
V. Misrepresentation. Typically only concerned with material false statements. What makes a false statement material is when a high risk is charged a low risk price. ICs try to fight adverse selection by forcing disclosure of material information.
A) The Auto Ins. Misrepresentation Problem (see state misrepresentation statutes, p. 71)
1. Note the difference between the traditional approach of letting ICs treat representations by –eds as warranties (obviating the need for materiality) and the modern representations approach. Some courts have required that the misrep be intentional.
2. Material misrepresentation (when a reasonable IC would have considered the misrep fact relevant to its concerns and important in determining its course of action) after a loss can also be grounds for rescinding a policy.
3. See sample state incont stats p. 71. See Wis. Stat. 631.11 (1)(b). (b) Misrepresentation or breach of affirmative warranty. No misrepresentation, and no breach of an affirmative warranty, that is made by a person other than the insurer or an agent of the insurer in the negotiation for or procurement of an insurance contract constitutes grounds for rescission of, or affects the insurers obligations under, the policy unless, if a misrepresentation, the person knew or should have known that the representation was false, and unless any of the following applies:

1. The insurer relies on the misrepresentation or affirmative warranty and the misrepresentation or affirmative warranty is either material or made with intent to deceive.

2. The fact misrepresented or falsely warranted contributes to the loss.
4. BOP is on IC to prove –ed knew or should have known – difficult. Can drive up costs of settlement.
5. If, like NY & IA stats, leaves fraud to common law, may limit damages to difference between premium paid and premium that would have been paid, not voiding K.
6. If stats void K, then for liability probably only prospectively (protect 3d parties). For first party, maybe void as to this incident.
7. BL – A lot rests on the interaction between IC and –ed. If IC no ask/reask, harder to claim misrep. Can always make the case that –ed had a duty to disclose or look to the K language.
B) Cox v. Am. Pioneer Life Ins. Co. (Dauksch, Fla. Ct. App., 1993) (MAJORITY RULE; softening the impact of misrep law)
1. P parents seeking family med ins. They make several misreps to IC as to daughter’s having a certain disease, when she was last treated for it, whether they’ve been turned down for coverage by any other IC, etc. P did tell agent about the disease, and provided agent with daughter’s med records, but those records only went to 1987, omitting daughter’s treatment for the disease in 1989, only a month before P’s application.
2. Trial Ct – JNOV for D.
3. App Ct – Reverse.
4. Ct’s reasoning – IC here was on notice as to daughter’s condition. –ed did make some misreps on the application. However, where an insurer is on notice that it must itself make further inquiries about an insured’s health, it is bound by what a reasonable investigation would have shown. IC here was on notice but didn’t perform the investigation which would have resulted in their finding the relevant med records. That’s the cause of the bad coverage – not P’s misreps. The could have reasonably been found to be immaterial by the jury.
5. Post-claim underwriting (pejorative term) presents some cost benefits to ICs – only investigate further those –eds that generate large claims.
6. Wis. Stat. 631.11(4) makes knowledge by IC very hard to overcome for IC in its defense.
7. Note the reliance factor here – -ed relied and didn’t look elsewhere in the meantime.
8. Another doctrine: duty to investigate bridges the misrep.