How to Analyze a set of Insurance Facts
1. Is the risk covered?
2. Is there an exclusion in the coverage?
3. Is action blocked by action of insured? Concealment, misrepresentation, increase of risk?
4. Has the insurer waived the defense?
5. Is insurer estopped by doing something that causes insured to change position in reliance on the insurance company?
Important terms
· Insurance: managing risk, policy defines terms to transfer the risk.
· Underwriter: reads the app and prices the risk
· Actuary: macro finance, det’s whether risk should be taken, prices entire line, generally not apps
· Premium: Price paid
· Warranty: must be adhered to or policy is void
· Representation: may be equitably and substantially answered; if material, must be adhered to; if not material, not necessary to be adhered to;
· Misrepresentation: will void a contract if it was relied upon and it was material to the insurance contract; look at reasonableness and reliance; also is it a material representations; if yes, policy probably void.
· Concealment: knowledge element to misrep; innocent failure to disclosure does not void policy;
· Inquiry notice: if ins co could have reasonably followed up or verified, no misrep or concealment
· On inquiry: Insurance company is on inquiry when applicant leaves blanks on the application.
· On notice: insured is on notice what the underwriter thinks is material on the application.
· Estopple: once ins co, agent or rep, makes a statement at outset, will be held to it
· Waiver: knowing relinquishment of a right
· Insurable interest: Insurable interest exists if, at the time the policy is issued, the continuing life of the insured benefits the named beneficiary (love or pecuniary relationship); prevents gambling/wagering contracts; protects against moral hazard
· Principle of indemnity: insurance contracts will not confer a benefit to insured greater than the loss suffered; will not create an opportunity for gain; protects against moral hazard
· Subrogation: Stepping into party 2’s shoes to assert that party’s rights against a 3rd party.
· Interpleader: procedure by which ins company gives money to court to figure out who it goes to
· Risk transfer: insured id’s risk, seeks to xfer to another, pays more as risk adversity level rises
· Risk-pooling: insuring a large group, all paying premiums, betting only a few will make claims
· Risk allocation:
· Underwriting setting the right price as per the risk
· Classifying risk and allocating cost as per classes
· Encouraging/rewarding good behavior by lowering premiums
· Example: charging a person who lives in a house of straw more than the person who lives in the brick house because of the degree of risk involved…another example is health insurance
· Law of large numbers: how ins companypredicts losses and develops premium pricing over a product line to create a predictable loss ratio that will ensure the premium base covers losses. Generally, the accuracy of the prediction increases as the insurance company keeps track of greater number of similar risks and losses on those risks.
· Re-insurance: ins co purchases to insure against loss, spreads risk among more than 1 ins co\
· Adverse selection: insuring the wrong people…eg, only insuring houses in tornado alley
· Moral hazard: lack of incentive to guard against risk insured against
· Contra proferentem – ambiguity is construed against the drafter
· Uberrimae fidei: utmost good faith: duty to
hat are in conflict with such statutes are void.
Reasonable expectations/Contra proferentem/Ambiguities
· A genuine ambiguity arises where the phrasing of the policy is so confusing that the average policyholder cannot make out the boundaries of coverage.
· Reasonable expectations and contra proferentem doctrines are very fact sensitive – note that these are two different arguments; both can be used, but not as one argument; Contra proferentem argument requires an ambiguity.
· Ambiguity is NOT required to apply the reasonable expectations doctrine.
· Contra proferentem: lean towards coverage if:
o The policy language will reasonably bear a pro-coverage interpretation
o The policy language could reasonably have been drafted more clearly AND the insured could reasonably expect the coverage at issue
· Contra proferentem: insurance policy language construed against insurer and for insured → burden placed on insurer to show reasonable interpretation is the only reasonable and fair construction
· No ambiguous language → no parol evidence rule
· Objectively reasonable expectations of the insured will be honored when painstaking study of the policy provisions would have been required to negate. Objectively reasonable expectations will be honored even when the technical provisions of a policy would have negated those expectations.
Principles of reasonable expectations:
