INSURANCE LAW – Lariviere (Spring 2010)
A. What is Insurance
1. Insurance law is contract law. An insurance policy is a contract premiums are consideration
2. Some Definitions:
a. A contract of insurance is an 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.
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 JXs
(a).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 insurer 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
(i). WHAT IS THE PRINCIPLE OBJECT OR PURPOSE OF THE K?
3. Is it Insurance or Not:
(i). Sometimes it is unclear whether something amounts to insurance or not
(a).Look at Vance Factors
(b).Look at who is providing coverage
1. Seller or manufacturer – easier to argue warranty
(ii).These borderline cases are difficult to deal with and reconcile
(a). Applying a strict risk distribution test often leads to a finding of something being insurance
b. 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 do to limited scope.
1. A warranty promises indemnity against defects, while insurance indemnifies against loss or damage resulting from perils outside of and unrelated to defects in the article itself
2. A contract ‘substantially amounting to insurnce’ in this context is one that promises to cover losses or damages over and above, or unrelated to, defects within the product itself.
(iii). CAREFUL – other CTs had opposite result as Griffin
(a).Third party warrantys have been found to be insurance.
c. 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).WHAT IS THE PRINCIPLE OBJECT AND PURPOSE OF THE K?
1. Service or indemnity?
a. If Indmenity > Insurance
2. Here purpose was service – to rent a car
a. “Tangential risk allocation provision should not have the effect of converting the defendants as contracting lessors into insurers subject to statutory regulation”
d. Surety Contracts
(i). In CA Surety contracts are NOT INSURANCE
(ii).In other states surety can be insurance contracts
e. Self-Insurance Pools
(i). Pools of Self insurance usually not insurance – no traditional notion of indemnity
B. Policies Behind Insurance
1. Risk Aversion – People do not like risk, so they insure for piece of mind
a. Pay now to avoid the cost in the future
b. MORAL HAZARD – watch out!!! – If people have so much piece of mind because they are insured, they may be less cautious then they otherwise would be
2. Law of large numbers – use lage numbers and historical trends to predict risk and set premium amounts
a. Base premiums of actuarial tables from years of experience
3. Diversification – Insure many people against the same risk to reduce the number of claims for that risk
a. Better for the insurers and better for insured by driving premiums down
C. Categories of Insurance
1. First vs. Third Party
a. First Party – Policies that protect self or own property
b. Third Party – Protect against liability to others
2. Group vs. Individual
a. Group – through employers / ERISA
b. Individual – paid for by individual, auto, some health, homeowners etc
3. Primary vs. Excess
a. Is the insurance the first line of defense, or excess coverage
a. Insurance of insurance companies – self risk to others
II GOVERNMENTAL REGULATION OF INSURANCE
A. State Regulation
1. Purpose of Insurance Regulation
a. Protecting the Solvency of Insurers (Ensuring continuity of security for policyholders )
(i). Regulate Levels of capital
b. Ensuring that consumers are charged fair and reasonable prices PROTECT CONSUMERS
(i). Prohibition of discriminatory classification, excessive rates, unfair distribution
c. Preventing unfair practices and overreaching by insurers
d. Guaranteeing the availability 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).Solvency of Insurance companies MOST IMPORTANT
1. Ensure financial wherewithal
a. Check financials before transacting business in state and continually to allow continued activity within state
2. Power to haul in insurers whenever they want
3. Insurance co – not subject to bankruptcy laws – company is taken over and run by dept of insurance
4. NOT job of Brokers to investigate
a. CA – Wilson v. All Service Insurance 1979
i. Broker failed to investigate the financial condition of insurance company that is no bankrupt.
ii. It is the Ins. Commish’s job to investigate financial solvency, not that of a broker. No duty to insured.
1. License companies and agents / brokers
(d).Regulate rates of some lines of insurance
1. Prop 103 – 20% reduction in some rates
2. 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.
1. This is a response to consumer complaints
(f). Combating Fraud Against Insurance Companies
1. Fraudulent claims
(g).Bring action against companies and producers that misbehave
b. Regulation by state is subject to wide discretion
(i). Action by state insurance dept is reviewed on a a reasonable basis. So long as the interpretation of the statute was reasonable it is OK Chevron Deference
(a).Ostrer v. Schenck NY 1977
1. Ins. Commish promulgated rule to limit commission earned by agents on mass life insurance sales to unions.
2. CT – this was a valid use of delegated power.
c. Types of Regulation
(i). Permissive User Clauses
(a).Statutorily required “omnibus” or “permissive user clauses”
(b). Cannot contract around permissive users clause.
(ii). Mandated Coverage
(a).OK for CA to require all drivers to have insurance. Promotes security for all by requiring all drivers to be insured.
d. PROP 103
(i). Roll back and reduction of rates
(ii).Good driver discounts
(iii). Regulated future rates with Ins. Commission
(iv). Election of Ins. Commissioner
(v).Subjected Ins to Unruh Civil Rights act and no more antitrust exemption
B. Federal Regulation
1. United States vs. South-Eastern Underwriters 1944
a. SC says insurance was subject to federal regulation by Congress and subject to Anti-trust laws
(i). Prior thought was that it was beyond commerce power and thus till that point had been regulated only by states
2. McCarran-Ferguson Act 1945
a. Broad delegation to states to continue to regulate insurance
Authority to bind insurance company?
General agent – Yes
Special agent – maybe (scope)
Able to waive policy provisions
General – probably
Special – usually not
GA – no (direct liability)
SA – Yes vicarious
Duty to advise if coverage is sufficient?
GA – NO
Yes – if they are informed
e. Washington National v. Strickland
(i). Agent made representations to applicant that she would be covered immediately despite knowing she would likely be turned down or at the minimum need more medical examinations before coverage. Policy stated that receipt does not provided any temporary coverage, but insured relied on his statements and cancelled appointments w/ other carriers.
(ii).She is hurt, and ins co. refuses to issue a policy.
(iii). CT – finds that there is evidence that agent was either a general agent or special agent so Ins. Co. can be liable for his actions
f. Trying to limit authority on receipt may not be good enough if there is reliance
(i). Name is not dispositive – calling someone a broker means nothing if they have full authority to bind
(ii).If action of agent leads insured to believe they had apparent authority to act a reliance interest arises
2. Delay in Policy Issuance
a. Insurers have a duty after obtaining an application to accept or reject it within a reasonable time DUTY IS IN TORT – NO CONTRACT YET
(i). In an application for life insurance a cause of action lodges in a beneficiary, upon the applicants death for unreasonable delay on the part of the insurer in accepting of rejecting such application
b. Some premium receipts contain provisions that if application has not been accepted within a given time it is rejected.
(i). Usually there can be no silent acceptance
(a).A retained premium can be thought of us a deposit with an application and not consideration
c. Talbot v. Country Life Ins
(i). Revocation 2 days after death. No contract yet, accepting premium does not count as acceptance. Suit is in tort. But there may be an action
3. Binders In Action
a. A temporary contract for insurance while approval is pending
b. Unquestioned need for binders to provide coverage in a business world
c. World Trade Center v. Travelers
(i). Binder was issued before 9/11 and policy came on 9/14 with an effective date of prior to 9/11
(ii).Terms in binder were more favorable to insurer in definition of an occurrence
(iii). CT finds that Binder was in effect at time of loss so it is the policy in effect.