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Insurance Law
University of Kansas School of Law
Westerbeke, William E.

Topics in Insurance
Prof. Westerbeke
Spring 2003
Chapter 1
The Problem of Imperfect Information
The Nature and Function of Insurance
Three functions –
1) Risk transfer
2) Risk pooling
3) Risk allocation
1)      Adverse selection
a.       a party facing a high risk of loss is more likely to seek insurance coverage than someone who is not.
2)      Moral Hazard
a.       risk that an insured or insurance beneficiary would deliberately destroy the subject matter insured in order to obtain payment of an insurance benefit.
Breach of Warranty –
1)      A warranty in a policy of property insurance that a certain area is occupied by a certain person will not void the policy if the occupancy is not exclusive.
2)      To void a policy the Difference between representation and a warranty
a.       A false representation, to void a policy, must be material
b.      A false warranty need not be material to void a policy
Vlastos v. Sumitomo Marine and Fire Insurance Co (p.4)
Fire insurance on 4 story building.
Statement in contract warranted that 3rd floor is occupied as janitor’s residence.
If you warrant a certain condition to exist and it doesn’t, that voids the insurance. If it was a misapplication rather than a breach of warranty, then it would matter how material the misrepresentation. But, a breach of warranty voids the policy regardless of how material the breach. Since the contract uses the term warranty, it need not be a material breach.
2 flaws
1.      Does the clause have to be adhered to throughout the contract or only at the time the contract was made?
      Imposing a restriction throughout contract could be too harsh to enforce.
2.      Ambiguities—the terms used to describe the janitor’s dwelling does not specify the amount of space the janitor lives in. Does he have to occupy the whole 3rd floor? Or can he share the space w/ someone else?
If you don’t spell out in great detail the activities on other floors, it’s hard to say you
were requiring that only the janitor was on the 3rd floor. The fact a janitor was there was probably a fire safety factor in favor of the P.
–          Court implies that warranty only warrants that a situation exists at the time the contract is entered into.
Misrepresentation and Concealment –
1)      Insurers cannot avoid liability on an insurance policy on the basis of facts that were known to it at the time the policy went into effect. 
a.       Ward v. Durham Life Insurance Co.
                                                              i.      Alleged misrepresentations on the applications
                                                            ii.      Insurer is liable for misrepresentation on a policy
                                                          iii.      Insurer has a duty to tell the truth
2)      To rescind an insurance policy for fraudulent misrepresentation there must be a knowingly untrue statement of fact made with the intent to deceive or with reckless disregard for the truth
a.       Waxse v. Reserve Life Insurance Co.
b.      P didn’t report his HIV positive status on his insurance application because the questions did not directly address it.
3)      In order to prevent recovery on an insurance policy material misrepresentation made by the insurer must either be sufficiently material to the risk of fraudulently made.
a.       McKenzie v. Prudential Insurance Co. of America
b.      D refused to may payments to beneficiary of his life insurance policy because P made material misrepresentations regarding his health when he accepted delivery of the policy. 
1)      Misrepresentation
a.        when one makes a false statement of fact (intentionally or negligently) to induce someone to act in a certain manner.
b.      And they act in that manner to their detriment in reliance on the statement, then we have misrepresentation.
1)      Concealment
a.        if you leave something out, they can’t use it to void coverage if they had other ways to determine that info.
b.      To the extent that the agent knows, that knowledge is imputed to the insurer. Therefore, can’t treat the insurer as being misinformed if the agent knew unless there is collusion between agent and insuree.
Chapter 2 – Insurance contract Formation and Meaning 
1)      Benefits of standardized agreements
a.       meaningful coverage—helps everyone understand what contract provides. Easier to compare the prices and coverage among companies.
b.      clarity in language
c.       consistency of application
–          does the word “sudden” mean abrupt?
–          Or does it mean unexpected?
–          Ambiguity will be construed against the insurer. 
–          To what extent should an ambiguity combined w/ reasonable expectation be construed against insurer.
Broadly construed
–          “we are going to cover you for the following”
–          Narrow construed “we exclude X, Y and Z from coverage.”
–          The policy s/b read as a whole w/ reference to its provisions whenever possible.
–          Same terms in diff. parts of a policy s/b interpreted the same way.
–          Contra proferentem “against the drafter” we should interpret against drafter.
1)      Role of Standardized Forms
a)      The Policy Drafting Process
i)        Encourages competition in insurance world
ii)      Long Arm Jurisdiction
(a)    Developed through Insurance Services Office
(i)     Benefits include
1.      Uniform Language
2.      Meaningful comparisons
3.      Clarity in the language
4.      Consistency of application
5.      Flexibility in Commercial applications
b)      Construing Ambiguities Against the Insurer
i)        An ambiguous adhesion contract must be construed against the drafter of the contract
ii)      An ambiguous provision in an insurance policy is construed most favorably to the insured and strictly against the insurer. 
iii)    Contra Proferetem
(1)   Against the Drafter
iv)    Rustoven v. Commercial Standard Insurance (p.37)
(1)   Uninsured Motorist Coverage
(a)    Stacking
(i)     He gets some money from his own
(ii)   He gets some money from his employer
(b)   RULE – an ambiguous adhesion contract must be construed against the drafter of the contract. 
(c)    RULE – if the language of a policy is susceptible to two meanings, it must be given the meaning mores favorable to the insured as long as it is not beyond the reasonable expectations of the insured.
v)      Vargas v. Insurance Company of North America (p.40)
(1)   Plane Crash
(a)    INA denied insurance coverage on the ground that the loss did not occur “within” the United States
(b)   “within”
(c)    Under NY law ct. says the policy should be construed “most favorable to the insured and most strictly against the insurer.”
(d)   RULE – an ambiguous provision in an insurance policy is construed most favorable to the insured and strictly against the insured. 
c)      Honoring the Reasonable Expectations of the Insured
d)     The objectively reasonable expectations of the insured will be honored even though the technical provisions of the insurance policy would have negated those expectations
e)      Ambiguity in an insurance policy is not required for application of the reasonable expectation doctrine
i)        Atwood v. Hartford Accident & Indemnity Co. (p.45)
(1)   Insurer is obligated to pay damages caused by product insured
(2)   Critical reading is located within the heading
(a)    Atwood says that Insurance Co. buried the exceptions
(3)   Role of the Agent
(a)    Could they sue for negligence?
(4)   RULE – The objectively reasonable expectations of the insured will be honored even though the technical provisions of the insurance policy would have negated those expectations. 
(5)   RULE – An insured must be able to read an insurance policy and have reasonable expectations of coverage. There must be fair notice to the insured about what will be covered and what will not be covered by the insurer.
ii)      Atwater Creamery v. Western Mutual (p.50)
(1)   Burglary Claim
(a)    No physical marks proving forcible entry
(i)     Insurance company didn’t want to pay
(b)   RULE – ambiguity in an insurance policy is not required for application of the reasonable expectations doctrine. 
Elmer Tallant Agency, Inc. v. Bailey Wood Products (p.58)
One place where you can nail insurer – in a negligence case whether they fail to procure insurance.    Negligence claim against an insurance agent for failure to procure. This doesn’t mean that they company is now your agent. The agency will have to cover that given loss but they will not be on the hook for further losses.   Once the client has notice that he has no insurance. Then it is his duty to go and procure insurance. 
RULE – An insurance agent acting with apparent authority can bind coverage although there were private undisclosed limitations on the authority. 
Authority of the Agent
1) an insurance agent acting with apparent authority can bind coverage although there were private, undisclosed limitations on the authority. 
Waiver and Estoppels
1)      Estopple
a.       Estoppel for misrepresentation by an insurer after the inception of the policy is not available to bring within coverage those risk not covered by the policy terms.
b.      Estoppel is some conduct by a party that then prevents that party from then taking usual action
c.       can not create coverage it can only negate defense or limitation on coverage
Roseth v. St. Paul Property and Liability Insurance Company (p.63)
Livestock mortality insurance. 
When insurer has an auto accident with his livestock trailer some of the animals had to be put down the rest of them were “disturbed”   Insurer called his agent and saw the adjustor. He told adjustor that he had “all purpose” coverage. Insurer had to sell his injured cattle to mitigate losses.   His policy didn’t cover this mitigation. He argued Because adjustor “agreed” with the insurer. He relied on the adjustors word. He acted in good fail on that word. Insurance company should be estopped from denying coverage. 
Is insurance company bound? No, court says estoppel can’t create coverage.      There must be a

nd circumstances of the particular case
9)      Professional Liability Insurance
a.       The notice period for a claims made policy will not be extended because the claim was not discovered during the policy period
10) Directors and Officers Liability Insurance
a.       The regulatory exclusion to directors and officers liability coverage does not violate public policy.
Liability Insurance
Three types –
1) Commercial General Liability Insurance (CGL)
1)      General Insurance against the kinds of liability that any business may face. 
2) Homeowners policy
3) Automobile policy
AY McDonald Industries v. Insurance Co. of North America (p.409)
1)      Company who manufactured brass valves caused pollution. EPA entered into an agreement with manufacturer through the superfund. In this agreement manufactures agreed to
a.       Design and construct a clay cap over specific parts of property
b.      Expand its groundwater monitoring system
c.       Develop and implement a post-closure plan for a period of thirty years
2)      Issue is clean up cost – covered by damages?
a.       Insurance company says no
3)      Should EPA recover response costs?
a.       What are damages?
                                                              i.      What are damages because of property damages?
1.      you can’t get future protective damages. That isn’t because of property damages. 
                                                            ii.      Property damage must occur before response of cleanup cost are covered
1.      Cost incurred to pay for preventive measures taken in advance of pollution are not “damages because of property damage” But costs for preventive measures taken after such pollution are “damages because of property damage” and so are covered.
                                                          iii.      Voluntary clean-up (p.418)
RULE – Response or cleanup costs are compensatory damage for injury to property and are covered by the property damage clause of the standard CGL policy. 
If you have a pollution case the EPA can do the clean-up work and then order you to clean it up
Are remediation cost occur at the …?
Property damages – environmental damage = property damage – unless you are talking about future damage. 
The trigger and Allocation of Coverage
            Manifestation vs. Injury
1)      what is the date of exposure
2)      date of manifestation
3)      NO court says that it is date of actual injury
a.       Exposure – first time you are exposed to the injurious condition
b.      Manifestation – lost of damage to the body (helps with higher coverage)
4)      Number of occurrences also a factor
a.       Livestock feed case – each shipment of feed is an occurance?
American Home Products Corp. v .Liberty Mutual Insurance Co.  (p.419)
Pharmaceuticals liability case. AHP case
Issue : when does “injury, sickness or disease” occur. What triggers coverage during the policy period?
Holding – the polices are construed to require a showing of actual injury, sickness or disease occurring during the policy period, based upon the facts proved in each particular case. Thus an occurrence of person injury sickness or disease, is read to mean any point in time at which a finder of fact determines that the effects of exposure to a drug actually resulted in a diagnosable and compensable injury.
RULE – occurrence based liability coverage is triggered not by exposure or manifestation, but when a person suffers an injury in fact. 
Exposure Theory – (p.423)
1)      They cover occurrences wherein both exposure and an injury take place.
a.       One problem – exposure doesn’t mean harm
b.      What means harm?
The Manifestation Theory (p.425)
1)      covered only when the harm becomes manifest
a.       problem — harm or damage occurred earlier now insurance company that came alone earlier will have to pay. 
b.      Pragmatic problem – who would want to insure someone for “future harms”
2)      Solution : Sound Requirement – the mere exposure to some substance is not damage.