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Insurance Law
University of California, Hastings School of Law
Lariviere, Margie

Insurance Law – Lariviere (Fall 2013)

I. Basics of Insurance Contracts

A. Basic of the Basics

1. Insurance law is contract law. An insurance policy is a contract. Premiums are consideration.

2. Multiple definitions for insurance:

a. A contract of insurance is an agreement in which one party (IR), in exchange for a consideration provided by the other party (ID), 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.

b. Cal. Ins. Code §22: A contract whereby one undertakes to indemnify another against loss, damage, or liability arising from contingent or unknown event.

(i) Two Key Elements of Insurance – All Jurisdictions

(a) Risk of Loss

1. A contingent, unknown, or fortuitous event.

(b) A distribution of the risk amongst similarly situated persons.

c. Vance on Insurance: Distinguishing characteristics of insurance

(i) The insured possesses an insurable interest.

(ii) The insured is subject to loss through the destruction or impairment of that interest by the happening of some designated peril.

(iii) The insured assumes the risk of loss

(iv) Such assumption is part of the general scheme to distribute actual losses among a large group of people.

(v) The insured pays a premium as consideration for the promise.

d. Last Resort: What is the principle object or purpose of the K?

B. Is it Insurance or Not Insurance?

1. Generally:

(i) Look at the Vance Factors

(ii) Look at who is providing coverage

+Seller or manufacturer: Easier to argue warranty.

(iii) Applying a strict risk distribution test often leads to finding something being Insurance.

2. Warranties/Vehicle Protection Plans

(i) A regular warranty is not insurance, but 3rd party warranty may be.

(ii) Third Party Warranty – Griffin Systems v. Ohio Dept. of Ins – Ohio 1991.

(a) Is a vehicle protection plan provided by a 3rd party (not seller or manufacturer) which protects against damage to tires insurance?

1. CT says it is a warranty

2. CT – Insurance covers loss or damage over and above the defect itself while a warranty covers a defect. Does not focus on the status of parties but the type of coverage promised within the contract.

3. Careful – Other CTs had opposite result where third party warranties have been found to be Insurance.

3. Collision Damage Waivers

(i) Truta v. Avis Rent a Car CA 1987

(a) Pay $6 to waive payment of $1000 for damage to rental car.

(b) CT looked at the principle object and purpose of the K.

1. Service or Indemnity?

+If Indemnity = Insurance

2. Here, purpose was service = to rent a car

4. Surety Contracts

(i) In CA, Surety Contracts are NOT INSURANCE

(ii) In other states, Surety Contract can be insurance contracts.

5. Self-Insurance Pools

(i). Pools of self-insurance usually are NOT INSURANCE – no traditional notion of indemnity.

C. Policies Behind Insurance

1. Risk Aversion – People insure for the purpose of peace of mind

2. Law of Large Numbers – Use large numbers and historical trends to predict risk and set premium amounts. IR bases premiums of actuarial tables from years of experience.

3. Diversification – Insure many people against the same risk to reduce # of claims for that risk.

(a) Better for the insurers and better for insured by driving premiums down

D. Categories of Insurance

1. First v. Third Party Insurance

(a) First Party – Policies that protect self or own property

(b) Third Party – Protect against Liability to Others

2. Group v. Individual

(a) Group – through employers/ERISA

(b) Individual – paid for by individual, auto, some health, homeowners, etc.

3. Primary v. Excess

(a) Is the insurance the first line of defense, or is it excess coverage?

4. Reinsurance

(a) Insurance of insurance companies – self risk to others

E. Attorney’s Duty

1. Investigate Client’s Coverage & Notify Client’s IR

(a) A legal malpractice may lie based upon a law firm’s failure to investigate its client’s insurance coverage and/or to notify its client’s carrier of a potential claim. Shaya B. Pacific v. LLP NY 2006.

(i). Basic lesson is to protect your client diligently by researching background.

II. Government Regulation of Insurance

A. State Regulation

1. Purpose of Regulating Insurance

a. Protect the Solvency of IR (Ensuring continuity of security for policyholders)

(i). Regulate Levels of capital

b. Ensuring that consumers are charged fair and reasonable prices

(i). Prohibition of discriminatory classification, excessive rates, and unfair distribution

c. Preventing unfair practices and overreaching by IR.

d. Guaranteeing the availability of coverage to the public.

2. State Regulation

a. In CA – Dept. of Insurance (branch of executive)

(i). 6 areas of CA regulation

(a). Regulate terms of Insurance Contracts

(b). Ensure Solvency of Insurance Companies – Most Important!

(c). Licensing

(d). Regulate rates of some lines of insurance

1. Auto Ins – CA at minimum must consider driving records, miles driven, and years of driving experience.

(e). Conduct market conduct exams – examine sales and underwriting practices.

(f). Combating Fraud against Insurance Companies

(g). Bring action against companies and producers that misbehave

b. Regulation by state is subject to WIDE DISCRETION

B. Federal Regulation

1. United States v. South-Eastern Underwriters 1944

a. SC says insurance was subject to federal regulation by Congress and subject to anti-trust laws

2. McCarran-Ferguson Act

a. Provides broad delegation to states to continue to regulate insurance

(i). “The business of insurance, and every person engaged therein shall be subject to the laws of the several states which relate to the regulation or taxation of such business.”

(a). To the extent that states choose to regulate, federal regulation is preempted.

(b). Activities of insurers NOT within the business of insurance are subject to federal regulation

1. Federal Tax laws

2. Equal Protection Clause – through Fed funded insurance programs

(ii) There is a federal preemption if a federal statute “specifically relates to the business of insurance.”

b. “Business of Insurance”

(i) Three Part Test:

(a) Does the activity involve the underwriting act or

he information regarding its financial condition. Wilson v. All Service Insurance (Court of Appeal of California; 1979).






Authorized to bind

General Agent – Yes

Special – Maybe


Waive policy

General Agent – Yes

Special Agent – Usually Not


IR vicariously liable?

General Agent – No (Direct)

Special Agent – Yes (Vicar)


Rescind for misrepresentation



Duty to advise about coverage

Generally No

Depends what you tell the broker

4. What happens when the incident triggers while the binders, not the final policy, are in place?

a. Binders are enforceable, temporary contracts for insurance independent of the policy before the actual

insurance policy takes place (while approval is pending). World Trade Center Properties, LLC v. Travelers (345 F.3d 154; 2003).

(i) Ex. Court finds binder was in effect at time of loss, so the binder’s policy is in effect.

b. When construing the contents of the binder, courts first look at specific terms in binder, then turn to the

policy. But if the binder does not say it is going to incorporate the terms, then it will incorporate the standard and usual terms. When it is unclear whether it is a standard and usual term, then the court will interpret it in favor of the insured. Alea London Lt. v. Bono-Soltysiak Enterprises (CoA of Missouri; 2006)

5. What if the agent broke the “rules” and did not get approval before issuing the insurance?

a. Underwriting requires insurer’s approval before the issuance of the bonds if there is an underwriting

agreement. If the agent did not get approval, then the agent is required to reimburse the insurer for payment made. Ohio Farmers Ins. Co. v. Dakota Agency, Inc. (SC of North Dakota; 1996)

C. The Law of Misrepresentation: an Applicant’s Problem in Negotiation

1. Misrepresentation

a. Rules:

i. Insurer has the right to know all that insured knows

ii. Material Misrepresentation is grounds for rescission – Representation is material to the risk

a. In CA, subjective test – was it material to this particular IR?