Principles of Insurance
Prof. Jill Anderson
Main functions of Ins institutions
a. Gate-keeping: Ins is prerequisite to other activities
Social Stratification: Ins companies can both reflect & create the broader social conditions that lead to social stratification
Capital Accumulation & Allocation: Tremendous amount of capital is reserved by ins companies, it doesn’t sit around, it is invested in government bonds, real estate, commercial loans, etc
d. Knowledge Production: Ins company is a tool for the collection, analysis, & use of information
e. Security: pay premium in exchange for a promise to pay in case something happens
II. Unilateral K: $$ for performance (IDs $ in exchange for IRs promise to pay)
III. Ins is different from private King:
a. Its $ for a promise; solvency; cant inspect ins policy (like inspecting car); risk spreading; risk aversion
IV. Ins regulation: managing the problems attendant to ins problems
V. Risk: something bad that can happen; risks mature into harm
VI. Risk tx: transaction that transfers/shifts risk from 1 person/entity to another
VII. Risk spreading: IRs pool risk & spread risk throughout a group of ppl
VIII. Risk aversion: preference for certainty over uncertainty w/ regard to future loses
IX. Law of large #s: idea that we can be ↑ certain about the future experience of large groups in the aggregate than we can be about the future experience of any single individual in that group
a. The larger the # of ppl that your spreading the risk over, the easier it is to predict the risk
b. ins co are trying to predict the future so ins have to figure out how to price their policy by looking to the past (to get $ of policy)
c. diversification: ins co diversify risk by insuring many ppl
X. ins practices are about managing adverse selection & moral hazard
Once an ins company takes responsibility for a risk, it has greater incentive to prevent that risk from materializing into harm
Used to refer to the theoretical tendency for ins to reduce incentives…
i. To protect against loss &…
ii. To minimize the cost of a loss
PH Moral Hazard:
i. PH Moral Hazard: tendency for ins to reduce incentives to prevent loss or to minimize the cost of a loss
1. Torch My Ride article, PH caused the loss
2. Ex. Once the driver tx the risk, the worry is that the driver will not do things to prevent the loss from maturing
ii. PH MH: reduced incentive to minimize cost of a loss (bc IR will pay for it)
1. Once a loss has occurred, the party that has already transferred the risk has ↓ incentives from stopping ↑ risks.
2. Or not mitigating the cost of the loss; (for PH anything kept is a gain)
iii. Solutions to curb PH MH:
1. Community of fate: what’s bad for IR is bad for ID
a. Collect deductibles; co-pays;
2. K on care: create incentives for ppl to take ↓ risk
a. (discount for AVS brakes, good grades etc); create limits on what & where you can do/go (list of mechanics); give rebates on safety (ex ante MH);
3. Exclusion clauses: IR thinks certain activity is soo bad so excludes it (exclude risks where MH is particularly high (cosmetic surgery))
IR moral hazard: Tendency on IR to not pay out claims or to minimize the amount of the claim
i. IR ex ante MH: not pay loss
ii. IR ex post MH: anything spent on claim is a loss for the IR
Ex Ante Moral Hazard
i. Occurs bf the loss
Ex Post Moral Hazard
i. Occurs af the loss
XIII. Adverse selection:
Def = Used to refer to the theoretical tendency for high-risk ppl to be ↑ interested in ins than low-risk ppl
Theoretical result is average risk of ppl who choose to purchase ins will be higher than average level of risk of population
c. Information problem: ID will have info about their risk level that IR wont have
ID side Adverse Selection
i. Theoretical tendency for high risk individuals to buy ↑ ins than low risk
IR side Adverse Selection
i. “Race to the bottom”
1. IRs provide only low cov policies for ↓er price bc IDs are not willing to pay ↑ for a higher cov policy
f. Why Adverse selection a problem?
i. “Lemons problem”
1. High risk for “lemon” cars
2. Low risk for “peach” cars (drop out, ↓ # in market)
a. Low risks will drop out of ins pool, a reason why ins is m&atory
3. E.G. of IR side lemons problem is fire ins of late 19th Century
a. Consumers couldn’t tell a “peach” one from a “lemon, so they all began buying “lemon” policies, eventually driving the good “peach” ones out of market (Result = legislature had to step in
g. Solution to adverse selection:
i. IR: needs to get as much info as possible about ID
ii. ID: needs to get as much info as possible about IR
h. Ins regulation: about controlling IR adverse selection & ID adverse selection
i. Ins reg about trustworthiness, honesty & transparency.
Propitious selection = ppl who buy ins may be, on average, ↑ risk averse (safety conscious) than ppl who don’t buy, & that higher levels of risk aversion are correlated w/ ↑ safety-oriented behavior (affects IR too)
Cream-skimming = offering low prices policies to other IR’s low-risk customers (the best type of customer) – Promotes adverse selection
XIV. Society & Ins:
a. Society on the Basis of Mutual Life Ins; Jacques 1849
i. Point: network of altruism; having ppl work together; only the fortunate get nothing for something.
i. What is our share of the risk or do we pay for our own risk?
ii. To what extent is ins the solitary creating techn or stratifying polarizing tech?
c. Social stratification: ins is both a response to culture & creates culture
i. There are different lines & diff types of ins where adverse selection can have a ↑ pronounced or muted effect; same with moral hazard.
ii. Requiring ppl to have ins makes sure that there are “peaches” in the market…
iii. Spreading responsibility (not just risk): ↑ responsible for bad things that happen if poorer while wealthy ↓ responsible for bad things that can happen
K LAW FOUNDATIONS
Ins K interpretation:
Ins law is different from K law (need to underst& the diff)
XV. Contra proferentum (“against the draf”) = instruct the ct to interpret ambiguous ins policies in favor of PHs
a. Used in extreme circumstances – Serves as a tiebreaker when the right answer can’t be figured out or backdoor way to strong RE
b. Can be Formalist too (if just the K is being analyzed, here the entire transaction was)
Gaunt v. John Hancock Mutual Life Ins Co. (US – 1947)
i. PH completed his ins application but it wasn’t yet approved by IR (sent back & forth many times)
ii. (H&): PH would assume that it was approved af he passed med exam & paid premium, even though ins underwriter would have read K language & underst& it wasn’t & that approval was still necessary (reasonable expectations)
1. IR should bear the burden of unclear K language
a. Be ↑ fair to PH when deserving
2. Where is the confusion? = P would believe he is done once the premium is paid, application complete & he passes his physical.(latent ambiguity)
iii. Solution: IR can rewrite K to make it ↑ clear & have ↑ warnings to sign on to, but (problem) this could lengthen K & make the ID ↓ likely to read K
iv. Concurrence (Clark): decisions shouldn’t turn on ambiguity; contra proferentum has dark side: reading language strictly into the ambiguity box invites draftsmen to revise it to make it ↑ clearer but this will create ↑ uncertainty; we should be frank & call this situation unfair instead of talking about ambiguity
a. If this had been 2 businesses familiar w/ ins K’s thru previous course of dealings they would have known what the K language meant
v. N: view of H& & Clark: H& is formal approach; Clark is ↑ substantive
Plain meaning rule:
World Trade Center Properties v. Travelers Indemnity Co. (US – 2002)
i. Meaning of “occurrence:” 1 or 2 occurrences? K language is ambiguous; P wants
iv. Jenkins v. Indemnity Ins Co. of North America
1. To waive a claim of law, a party need not be certain of the accuracy of the claim & its legal efficacy, the conclusion that a party has waived a right is one of fact for the trier of fact, & once a right is waived the waiver cannot be withdrawn.
2. Facts: Jenkins, a NY resident, got in car accident & wife suffered injuries; policy covered injuries sustained by any person arising out of use of his car; NY law stated that spousal injuries were not within cov un↓ expressly provided for; Indemnity sought to avoid payment. wifes atty told D about NY law; D said will pay them; but once read law D didn’t want to pay
3. Held: P won; defines known right: don’t have to be certain of correctness of the claim; enough if IR knows of the existence of the claim & of its reasonably possible efficacy.
b. Estoppel: When one party’s acts or representations reasonably induce detrimental reliance on part of another.
i. While waiver depends solely on IR’s conduct, estoppel depends on conduct of both IR & PH.
ii. Terms of estoppel:
3. Detrimental reliance
4. Boilerplate Undercuts dickered terms
5. No actual knowledge of policy terms
6. Reasonable not to read!!!!*** (this addresses Dissents in Draner argument that estoppel will discourage ppl from reading the K, but not reading it needs to be reasonable)
7. Causes injury
iii. Darner Motor Sales, Inc. v. Universal Underwriters Ins Co.
1. A jury may find that an ID acted reasonably in not reading a specific provision of his ins policy if, by justifiably relying on the IR’s assurances or some other justifiable reason, the ID was unaware of the limitations of that provision.
2. Facts: Darner leased cars & agent acting on part of Universal sold him umbrella policy suggesting ↓ees were covered in amounts of $15,000 per individual & $30,000 per accident, but policy indicated ↓ees were not covered; Pr read his policy, was concerned, talked to agent, & was informed by agent that his umbrella policy will cover you up to these higher limits; trial ct: agreement is 4 corners of K
3. Held: P win; agreement is in assent; look to parties actions for evidence of assent; used estoppel theory
4. Why does the ct permit an estoppel argument?
a. This is a st&ard form K.
b. The term in question was separately negotiated.
c. Detrimental reliance
i. In his Ks, put the higher limits.
d. There was no actual knowledge of the disputed term.
5. Rationale: Had Darner read his policy, though, he would have found it did not cover the risk he hoped it would.
a. Ct’s decision in Darner does not imply that PHs should never read their policies, only that in some circumstances it is reasonable to not read a policy.
b. Doesn’t discourage ppl bc this is how P discovered the mistake in the 1st place so it would encourage reading
6. Concurrence- Length & complexity of the K. It has to be reasonable that the PH would have no actual knowledge.
7. Dissent: maj=ignorance is bliss; if an element of estoppem claim is no knowledge, then discourages pl from reading the policy;
8. Notes: looking to only 4-corners of K=craxy results (Rodinich case)
9. Notes: this is minority rule; majority of juris: cant use estoppel to change written terms of agreement
10. Notes: Doctrine of Reformation: -fixes the mistake to bring it in line with what the cts determines the intent of the parties were; making a K that was mutually assented to earlier bf the boilerplate terms ruined it.