Insurance Law – Prof. Adam Scales – Spring 2013
Notes for Exam:
Read State and Federal Case and note differences with expected results
CHAPTER 1 INSURANCE, LAW AND SOCIETY
CHAPTER 2 CONTRACT LAW FOUNDATIONS
Insurance Contract Interpretation
Waiver and Estoppel
Role of Insurance Intermediaries
Misrepresentation
Disproportionate Forfeiture
Damages
Bad Faith
CHAPTER 3 FIRST-PARTY INSURANCE
Health Insurance
ERISA
Express Preemption §514
Complete Preemption §502(a)
ERISA Remedies
Scope of ERISA’s Preemptive Shield
Medical Neccessity
Mental/Physical Distinction
Preexisting Condition
Disability Insurance
Meaning of Disability (Soc Sec/Workers Comp/ADA)
Coordination of Benefits
ERISA
Life Insurance
Incontestability
Tax Benefits
Insurable Interest
Property Insurance
All Risk/Causation/Excluded Losses
Valuation
Business Interruption Insurance
Innocent Co-Insureds
Subrogation
Subrogation and the Collateral Source Rule
CHAPTER 4 LIABILITY INSURANCE
General Liability Insurance
The Agreement
Trigger of Coverage
What is Bodily Injury?
Application of Limits and Deductibles
Environmental Liability Insurance Trigger Issues
Intentional Harm
Expected v Intended
Public Policy
“Intent”
Criminal Acts Exclusion
Automobile Liability Insurance
Omnibus Clause
Family Member Exclusion
“Arising out of the Use of an Automobile”
Market Segmentation
Professional Liability Insurance
Definition of Professional Services
Late Notice Under a Claims-Made Policy
CHAPTER 5 LIABILITY INSURANCE RELATIONSHIP ISSUES
The Duty to Defend
Basic Duty
Terminating the Duty
Duty to Settle
Insurer’s Liability to Tort Victims
Conflict of Interests
Visualizing the Relationship
Pattern Conflict Cases
Dollar Limits
Verbal Limits on Covered Harm to Victims
Verbal Limits on Covered Harm to Policyholders
Verbal Limits Relating to Policyholder Obligations
Defense Lawyer’s Responsibilities
Duty to Cooperate
Basic Duty
Settlements
Liability Insurance and Tort Law
OUTLINE
CHAPTER 1 INSURANCE, LAW AND SOCIETY
Risk Averse- Seeking to avoid risk
Adverse Selection- Good policyholders leave insurance pool because of overpricing of their low risk
Ascriptivity- Characteristics that an individual cannot change
Moral Hazard- That people act differently with the presence of insurance (become less risk averse)
Law of Large Numbers-The larger the sample size in an insurance pool, the more the loss distribution becomes bell shaped, less like points of data
Ways insurers eliminate bad risks:
-Raise Prices
-Use exclusions to exclude coverage
-Market to only good customers
Insurance serves some societal purposes
-Loss Prevention – Insurers, assuming financial responsibility for losses strive to minimize them through safety measures e.g.
-Gate Keeping – Insurance is often a prerequisite to some other act, such as owning a car, getting a mortgage
-Social Stratification – The ability of those to get insurance vs. those that cannot crate social strata between them
-Capital accumulation and allocation – Insurance co’s create massive investment portfolios
-Knowledge production – Personal and claims history compiled is very valuable
CHAPTER 2 CONTRACT LAW FOUNDATIONS
Insurance Policy
Grant of coverage
Definitions
Exclusions
Conditions
Insurance Contract Interpretation
Insurers use forms, n early impossible to ever have a hand drafted insurance contract
Insurance companies have an emphasis on standardization of language across industry
Contra Proferentum – Through which ambiguous contract language is construed against the drafter, for the drafter is in the best position to have made the language clear
Gaunt- (murdered while paperwork was traveling around “home office”)Court steps outside the plain language of the policy to look at reasonable expectations of policyholder
WTC- (Each tower or one attack) One occurrence v multiple occurrences
CJ Fertilizer- (“no visible tool marks”) Court aggressively looks @ public policy to determine if there is an evidentiary condition, or non-existence of the insured event and which triggers/disclaims coverage
Scales- Sometimes there is no question about what the policy says, but the policy is crazy.
Courts use ambiguity or perceived ambiguity to address substantive issues of policy coverage
Reasonable expectations takes two forms:
1-strong- “no outside marks” policy says what policy says
2-weak-some measure of ambiguity is found to bend dictionary meaning in favor of policyholder
Waiver and Estoppel
Darner- 15/30 v 100/300 Salesman led policyholder to believe that he had the larger coverage
Estoppel- Promise + detrimental reliance
Waiver- has coverage, can’t then deny
Waiver or estoppel always extends coverage beyond plain meaning
Waiver and estoppel are always analyzed together
Bible v John Hancock- accepting premiums waives denial of coverage (no estoppel, no detrimental reliance)
Jenkins-
Roseth Problem (Sick Calves)- Illustrates that insurance does not cover diminution of value, only loss
Role of Insurance Intermediaries
Economy Fire v Bassett- (daycare from home) Homeowners policy extends to cover home businesses that are “real businesses”
Rustoven- Sum of all limits applicable to all covered autos
Misrepresentation
Many times comes up in applications for coverage
Issue is that with misrepresentation, there is unbargained for loss between the perceived loss and the actual loss
Contributing to the loss ≠ contributing to the risk
Pum v Wisconsin- badly worded questions from insurer, also insurer did not follow own policy looking into the risk
Courts are much less forgiving today to policyholder misrepresentation
Disproportionate Forfeiture
Grant of coverage is interpreted broadly while exclusions are interpreted narrowly
E.G. HO- exclusion “Arises out of the use of an auto” vs. Auto – Grant “arises out of the use of an auto”
Aetna v Murphy-
Damages
Kewin v Massmutual-
Bad Faith
To avoid bad faith claim, must settle policies within expected value of case
Anderson v Continental-
CHAPTER 3 FIRST-PARTY INSURANCE
Health Insurance
ERISA
ERISA says “If you don’t get benefits, you can sue for benefits”
Preemption clause “relates to any employee benefit plan”
Savings clause “states still regulate insurance”
Deemer clause “Benefits plan is not insurance”
Limits by which states to regulate employer sponsored health insurance
Corpà Employee (direct insurer, pre-empted by ERISA)
CorpàPlan AdminstratoràEmployee (Administrated plan, pre-empted by ERISA)
CorpàBuys Insurance PolicyàEmployee (not subject to ERISA pre-emption)\
Aetna slammed door on ways states had circumvented ERISA
SCOTUS says that congressional intent was to have ERISA occupy field of employer provided health plans
Stop-Loss insurance- purchased by self-funded employer health plans to cover crazy $$ claims
Same insurance K could be interpreted differently under state law than ERISA because of Arbitrary/Capricious
“Discretion to interpret the terms of the plan” = employers get out of jail free card… so long as language present, employer can interpret as they see fit so long as interpretation is plausible
Express Preemption §514
Complete Preemption §502(a)
Andrews-Clarke v Travelers-
ERISA Remedies
§502 permits suit to recover benefits available under the plan, only damages available
Scope of ERISA’s Preemptive Shield
Aetna v Davila-
Medical Neccessity
Pirozzi v BCBS of VA-
Mental/Physical Distinction
Arkansas BCBS v John Doe-
Preexisting Condition
Hardester v Lincoln National- combatting moral hazard vs. maintaining homogeneity of risk pool, don’t differentiate between people trying to defraud v people inopportunity
One of the underlying themes to the insurance company dynamic is that problems move to other insurers or to other insurers AàBàCàD
Disability Insurance
Meaning of Disability (Soc Sec/Workers Comp/ADA)
Prudence Life v Wooley- Policyholder must show that cannot do current job or any other job
Heller v Equitable- Own occupation disability insurance differs in that it just insures cannot do own job, more valuable, higher premiums
Coordination of Benefits
Cody v CT General- Policy holder with multiple policies su
ners
Professional Liability Insurance
Definition of Professional Services
Woo v Firemans- “Boar Tusks” = dentistry
Late Notice Under a Claims-Made Policy
Gulf v Dolan, Fertig & Curtis-
Root v American Equity- notice requirement in declarations and in exclusions, as in untimely claim is not a claim
CHAPTER 5 LIABILITY INSURANCE RELATIONSHIP ISSUES
Minority of jurisdictions allow direct action as in ΠàI, usually must track ΠàDàI
Smart Π will complain sounding in intentional wrong as well as negligence… underlitigation
The Duty to Defend
Right to defend v duty to defend v duty to indemnify
Basic Duty
Insurer cannot abandon insured without exposure to bad faith claim
Insurers seek declaratory judgment actions though courts only sometimes allow
Good for resolves coverage issues prior to trial
Bad because creates sort of two trials
Gray v Zurich-
Terminating the Duty
Employers Fire v Beals-
Duty to Settle
Reasonable Insurer standard B
Bad Faith claim assignable, usually in conjunction with covenant not to execute judgment against D
Must settle within policy limits if assessment places case at or around policy limits
Bad faith claim can turn $50k policy limit case into much more by sticking ins co with excess verdict
Without law, insurers would roll the dice more
Bad faith claim in some jurisdictions requires scienter, some dont
Comunale v Traders-
PPG v Transamerica-
Birth Center v St Paul-
If Π offers settlement within policy limits and ins co refuses to settle despite assessment of case in line with offer, excess verdict could go to insurer
Punitive damages – not ok if explicitly not covered in policy, but what if ambiguous? Public policy concern?
Insurer’s Liability to Tort Victims
Clegg v Butler-
Patsy v Family-
Moradi-Shalal v Firemans-
Conflict of Interests
Visualizing the Relationship
Pattern Conflict Cases
Dollar Limits
Verbal Limits on Covered Harm to Victims
Verbal Limits on Covered Harm to Policyholders
Verbal Limits Relating to Policyholder Obligations
Defense Lawyer’s Responsibilities
The biggest question is would D atty have operated the same way w/o ins co $?
Insurance Defense Counsel- atty provided by ins co to defend policyholder
Insurance Coverage Counsel- atty representing ins co fighting coverage
R.3d of the Law Governing Lawyers-
Steele v The Hartford- General release doesn’t except claims, covenant not to execute against one party does not limit suit by other parties
Duty to Cooperate
Basic Duty
Wildrick v North River- (lied re stealing $$) Had insurer known truth, would have tried to settle years earlier
Key is if Ins Co was prejudiced by failure to cooperate
Some states say failure to cooperate creates rebuttable presumption of prejudice
Settlements
Miller v Shugart- ($100k settlement/$50k policy) stands for concept of Π and D taking matters into own hands and settling case w/o insurer but allowing only $$ from insurer to pay judgment. Kind of like covenant not to execute in practice
Insured can protect themselves from ins co abandonment except for fraud/collusion
Ins co cannot ask for declaratory judgment on coverage prior to defending, must defend as well from day 1
State Farm v Gandy- Cannot have collusion in assignment of claims, one story in action yielding judgment, different story in bad faith action
