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Insurance Law
Rutgers University, Camden School of Law
Feinman, Jay M.

Insurance Outline – Prof. Jay Feinman
Rutgers University – Camden
Spring, 2008
Casebook: Insurance Law and Regulation: Cases and Materials
 
Contract of Insurance – LN20 – agreement in which one party (the insurer), in exchange for a consideration provided by the other party (the insured), assumes the other party’s risk and distributes it across a group of similarly situated persons, each of whose risk has been assumed in a similar transaction
 
Chapter 1 – Insurance, Law, and Society
 
I. Risk and Insurance 101 – p. 2
            A. risk – possibility that something can harm person, property, or enterprise
            B. risk transfer – arrangement transfers/shifts risk from one person/entity to another
            C. risk spreading – entity takes on risk an parcels it out to group of people
            D. risk aversion – preference for certainty over uncertainty re future losses
            E. premium – small, certain loss – protect against larger financial costs in future
                        1. get security of knowing will be protected
                        2. if risk adverse, makes sense to pay
3. should equal insured’s expected loss plus share of insurer’s administrative costs
            F. law of large numbers – more certain about future of large groups than of individual
            G. diversification – don’t put all eggs in one basket – diversify risks by:
                        1. insure many against same kind of risk – diversify exposure to risk
2. insure against different kinds of risks – diversity exposure to different kinds of risks
H. subdivide insureds into groups as long as cost of measuring differentiating factor less than premium reduction insurer can offer members of differentiated, better-risk group
 
II. Beyond Risk Spreading – Part One – p. 4
A. 3 economic problems limit ability to spread risk – moral hazard, adverse selection, and externalities
B. moral hazard – act in way wouldn’t act otherwise because you know you’re insured
1.  tendency for insurance to reduce incentive to:
                        a. protect against loss – not careful because know insurance will pay
                        b. minimize cost of loss – not caring how much repairs cost
            2. also have insurer side moral hazard – desire to pay out as little as possible
3. information problem – eliminate moral hazard by figuring out what people would do to be careful if no insurance and require same level of care
4. strategies to address moral hazards:
a. contracting on care – attempt to counteract moral hazard
                        i. but – difficult to monitor and practical limits
                        ii. financial incentive to invest in protection
b. community of fate – policyholder feels some of pain of loss – deductibles and co-payments
c. don’t cover/cover less if high degree of moral hazard
C. adverse selection – tendency for high-risk to be more interested in insurance than low-risk
            1. address by identifying risk status of potential insureds
2. lemon problem – information problem – solve if buyer could know if particular car a lemon or a peach
3. propitious selection – people who are more risk adverse -> more safety-oriented behavior -> people more likely to buy insurance are low risks
D. externalities – cost/benefit for people not in contractual relationship with parties produce cost/benefit
            1. negative externality – ex. pollution
a. lots of adverse selection in insurance purchase -> premiums up for everyone
b. insurer – if don’t pay awards, will affect entire market
                        2. positive externality – benefit to people not parties to insurance contracts
                                    a. fact that insurance exists benefits others
 
III. Beyond Risk Spreading – Part Two – p. 8
            A. functions of insurance institutions:
                        1. harm prevention – use safety precautions and loss experience to set prices
                        2. gate keeping – insurance as prerequisite for other activity
                                    a. not applicable for universal insurance
3. social stratification – different social positions for those with and without insurance
            a. can also reduce social stratification – SS
4. capital accumulation and allocation – enormous sums in reserve to pay claims
5. knowledge production – collect, analyze, and use info
 
IV. (Way) Beyond Risk Spreading – Insurance and Social Responsibility – p. 12
A. transfer of risk is transfer of responsibility -> insurance spreads both risk and responsibility
B. insurance companies want to cover people who are “responsible”
C. workers comp – structure so people act more responsibly by lower premiums if take preventative measures, help injured get back to work quicker, suppress claims, and make injured share financial responsibility
D. community rating – everyone pays same premium
E. open enrollment – no one turned away
 
V. Insurance Law – p. 19
            A. ways to categorize insurance:
                        1. by type of insurance
                        2. by protected interest (1st v. 3rd party) – LN49
                        3. by method of marketing (group v. individual) – LN60
                        4. insurer organization
                        5. profit v. nonprofit – LN52
                        6. type of agents to market – LN64
            B. ambiguities in text strictly construed against insurer
            C. exclusions construed narrowly and coverage grants broadly
D. indemnity – LN295, 676 – benefit from insurance company can’t exceed amount of loss
E. subrogation – equitable principle – lets one party who paid under legal compulsion another debt to creditor’s claim against third party
            1. promotes indemnity
F. US v. South-Eastern Underwriters Association – 1944 – insurance transactions subject to fed regulation under Commerce Clause
G. McCarran-Ferguson Act – 1945 – state regulations supersed fed law if states choose to regulate business of insurance
H. underwriting – process of deciding whom to insure and under what classification
I. incontestability provisions – LN329, 825 – stat of limits on insurer efforts to avoid paying claim based on fact insured misrepresented important fact when applying for insurance
            1. acts to bar defense based on policy’s validity but not on policy’s coverage
 
Chapter 2 – Contract Law Foundations
 
I. Introduction – p. 25
            A. use contract law for relationship between insurer and policyholder
B. ERISA (Employee Retirement Inco

rm – occurrence includes from one cause or one series of similar causes
4. insurance binder – LN220, 241 – contract gives protection pending detailed policy
                                    a. for convenience of all parties
b. enforceable present contract of insurance, but often terms must be implied
c. often infer that conditions/limitations in contemplated coverage were intended to be part of contract
                        5. NY law – when interpreting insurance contracts:
                                    a. intent of parties controls
                                    b. use ordinary meanings – plain meaning rule
                                    c. consistent with business objectives
6. if ambiguity, then Q of law for court – can use extrinsic evidence to determine intent
a. look at business purpose, trade usage, view of reasonably intelligent person with knowledge of trade, dictionary definitions
7. Newmont Mines – 2 separate parts of roof collapse several days apart from snow – held to be 2 occurrences
8. unlike Gaunt because parties here knowledgeable and sophisticated so can focus on business purposes
9. Silverstein – “occurrence” in Travelers coverage not ambiguous -> shouldn’t use extrinsic evidence
            a. fact “occurrence” not defined in binder doesn’t make it ambiguous
            b. should apply Newmont Mines
10. binders from excess insurers incorporated terms of insurance broker’s form, not Travelers form
11. “occurrence” in Travelers form ambiguous -> use extrinsic evidence to determine if intent to make 9/11 one or two occurrences
                                    a. Travelers binder, not 9/14 policy, applies
b. look at customary terms consistent with reasonable expectations in light of business purposes
c. start with plain meaning, but not restricted to plain meaning
12. as matter of law, one occurrence under WilProp form since part of “series of similar causes” -> entitled to only single policy limit
C. C & J Fertilizer, Inc. v. Allied Mutual Insurance – 1975 – p. 36 – LN195 – P did establish burglary within policy definitions once look at extrinsic evidence re negotiations and circumstances of agreement (3 alternative justifications – reasonable expectations, unconscionability, and implied warranty)
1. D breached implied warranty – encourages insurers to tell buyers limits of provisions and helps insurance purchasers select policy knowledgeably
a. based on series of conversations to buy burglary coverage and didn’t get it -> insurance company violated something like a warranty
b. won’t work here – doesn’t fit case
c. don’t focus on policy for implied warranty