Peter Molk – Insurance Law – Fall 2012 Outline
· 1. Introduction; Misrepresentation and Warranties (1-30)
o History and Functions of Insurance
§ Risk Transfer
· Transfers risk from risk-averse to risk-neutral
· Insured pays money to avoid greater potential loss
§ Risk Pooling
· Insurer takes a lot of individual risks and pools them. Diversification spreads the risk and lowers premiums
· Risks must be independent of each other
o Policies limit payouts when risks are not independent (floods, etc.)
§ Risk Allocation
· Prevents adverse selection
· Requires discriminating
o The Problem of Imperfect Information
§ Potentially disruptive effects
· Adverse Selection
o Charging the same price to high-risk and low-risk parties leads the low-risk parties to buy less coverage and the high-risk parties buy more coverage, increasing the average degree of risk held by the insurer.
· Moral Hazard
o Risk of the insured taking less care due to the fact they are insured.
o Prevention:
§ Exclusions, underwriting process, lowering rates over time, deductibles/copays
§ Breach of Warranty
· Vlastos
o Warranty: Can render a policy voidable if, at the time of signing, information was false
§ Most states read warranties as representations now. Avoids forfeits of coverage for innocent errors
o Any ambiguity is read against the drafter of the contract
§ In Vlastos, insurer could have stated “third floor is solely a janitor’s residence”
o Court reads as only relevant at time of signing.
§ Transformation of Warranty Law: Modern Law of Misrepresentation and Concealment
· Misrepresentation: Can render a policy voidable if four requirements are met
o False
o Material or Fraudulent
§ Need not be known to be false, just needs to be false
§ Material: Increases risk of loss
· Doesn’t require direct contribution
o Actual reliance
o Reliance was reasonable
· Neill v. Nationwide
o Nondisclosure
§ Same requirements as misrepresentation, but with scienter requirement: Knowing failutre to disclose material facts
o Court said no misrepresentation
o Some states have statutory scienter requirement for insured’s protection
· MacKenzie v. Prudential
o Between application and receipt of policy, MacKenzie finds out about high blood pressure. Would have voided the policy, so did not disclose.
o MacKenzie Rule: There is a duty to disclose substantial changes in health conditions that occurred after completing the application but before the policy is received.
· 2. Insurance Contract Formation and Meaning
o The Role of Standardized Forms; contra proferentem (31-51)
§ Policy Standardization Process
· By standardizing forms and policies, insurers can pool information and have more statistically reliable data
· Leads to competition over price and service, not terms
o Eventually necessitated administrative regulation to avoid ultra low prices or shady characters
· Insurance Services Organization (ISO)
o Provides standard forms that insurers use.
· Contracts of super-adhesion
o Insureds have no power or say in clauses
o Improving transparency
§ Plain-language movement
· Improve readability
· Formatting requirements
· Test of language defense
· Allow people to read the contracts
· Allow review by Consumer Reports, etc.
§ Construing Ambiguities Against the Insurer
· Sources of Ambiguity
o True Linguistic Ambiguity
§ Multiple possible interpretations of the words
o Contractual Purpose
§ Covering certain areas can lead to a belief in coverage between them
o Perfectible Language
§ Interpreted based on contract language
§ Could make the language clearly state their intent
o Reasonable Expectations
§ Look at the insured’s shared intentions, reasonable to expect that agent made sure he was covered
§ Court interprets in light of broader context
o Regulatory implications
§ Contract is contradicted by or contradictory towards the existing regulations
· Contra proferentum
o Ambiguous provisions are interpreted against the drafter of the contract
o All power is in the hands of the insurers, so it’s there duty to make sure it’s clear.
· Vargas
ed his authority
· In the best situation to know the limits of his authority
§ Insurer
· Best able to afford the cost
· Creates incentive to do due diligence in recruiting
· Even if liable, can seek indemnity against the Agent for his behavior
· Elmer Tallant Agency
· Actual v. Apparent Authority
o Actual
§ Principle has given Agent to work on P’s behalf
o Apparent
§ Principle has done something to make third party think Agent works on P’s behalf
§ Waiver and Estoppel
· Waiver
o Agent knowingly and intentionally relinquishes a right
· Estoppel
o Must have a promise, statemnt, or behavior
o Induces detrimental reliance
o Must be foreseeable
o Combination of the three must give rise to a remedy
· Reasonable Expectations
o Lacks the same requirements
o Not recognized in all jurisdictions, while Promissory Estoppel and Waiver are
· Roseth
o Roseth’s trailer got into an accident. Policy insured animals, but excluded those able to walk away.
o Had $9k loss from surviving cattle not covered
§ Had worked on the recommendation of the agent, who failed to correct him
o Majority Rule
§ Could be used to enlarge coverage beyond text of the policy.
§ Could be used against the company from imposing exceptions later that they have not excepted before
o Minority Rule
§ Can only be use to create coverage that is not present in the contract if the reliance occurs at or before the signing of the policy
§ Court ruled for insurer
o Note: Now misrepresentation that induces reliance after the signing can lead to waiver. In this instance could apply estoppel based on the reliance of selling the calves to minimize losses.
