Introductory Materials and Basic Principles
I. Introduction [1-21cb] a. The Nature and Functions of Insurance [1-3cb] i. Three broad functions of insurance:
1. Risk Transfer: if you have a nice new car you paid $20K, you are really not comfortable having the risk of losing. You pass that risk over to an insurance company and you pay them to take risk.
a. Although other things, like a $1K TV., you may just roll the dice in which you are comfortable with a risk.
2. Risk Pooling: getting a lot of insurers all at the same premiums, the claims are far outweighed by the Beke’s of the world who never have claims.
3. Risk Allocation: the tricky part, who do you pool? Problems really seen in health insurance whereas certain insurance companies look for people who have no histories.
Insurance law can help or hinder these functions, sometimes with justifications and sometimes without it.
b. The Problems of Imperfect Information [3cb] i. Breach of Warranty [4cb] 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. Vlastos v. Sumitomo (1983) [4cb, 2] a. Viastos (P) obtained a fire insurance policy containing a warranty that the janitor lived on the third fllo0r of the insured building, although it did not warrant that his occupancy was exclusive.
b. “Warranted that the third floor is occupied as janitor’s residence”
i. This alleged warranty is ambiguous in it’s wording for the warranty’s duties of the janitor post-insurance policy signings.
c. Ct.: holds that Vlastos warranted only that a janitor resided on the third floor, not that there was no other occupancy of the floor.
d. Vlastos (P) argued that the clause was a representation, not a warranty. The difference between the two is that false representation, to void a policy, must be material. A false warranty, on the other hand, need not be material. The court found it unnecessary to decide this issue, as its ruling was based on the assumption that the clause was a warranty.
2. Beke: court’s rarely rule in favor of the insurer behind a warranty failing. Legislatively, we have also put some restrictions in. Some statutes limit the warranty to maritime, while others are even more strict. Some will apply only to misrep. actions, while others apply to coverage [9-12cb].
ii. Misrepresentation and Concealment [13cb] The difference from above is that there has to be some kind of causal connection.
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. Ward v. Durnham Life Insurance (1988) [15cb, 3].
a. Ward’s (P) recovery on a life insurance policy was denied by Durnham (D) because of alleged misrepresentations on the application.
b. Some states require that an insurance applicant know a representation is false in order for the policy to be avoided.
i. Most jurisdictions impose a materiality requirement on the representation.
ii. In some jurisdictions, applications are not considered unless they are attached to the policy itself.
II. The Role of Standardized Forms [32-56cb] a. The Policy Drafting Process [32cb] i. ISO: Enhancing Competition in the World’s Insurance Markets [33cb] 1. The ISO standard coverage forms provide benchmarks that help insurance consumers and government make meaningful comparisons among in insurers on price and coverage.
b. Construing Ambiguities Against the Insurer [36 cb] How far one takes this is a matter of debate when “in contract language.”
i. Since parts of the policy are irreconcilably inconsistent, the policy is ambiguous and, therefore, is to be strictly interpreted against the insurer not beyond the reasonable expectations of the insured. Rusthoven v. Comm. Stand. Ins. Co. (1986) [37cb] 1. Rusthoven (P) was injured in an auto accident and claimed that he was entitled to stack coverage limits of a policy issued by commercial.
2. Beke: case in which we interpret ambiguity against insurer when the ambiguity is not unreasonable.
ii. An ambiguous provision in an insurance policy is construed most favorably to the insured and strictly against the insurer. Vargas v. Ins. Co. of Nor. Am. (1981) [40cb, 9] 1. Khurey and his family died when their private plane crashed going to Puerto Rico and INA (D) denied coverage based on a territorial limit of the policy.
2. The insurance company could have been very clear of what “over-water” during trips was in respect to the coverage.
a. Because the language was not clear, it was applied against the insurer.
b. Beke: case in which we interpret ambiguity against insured when the ambiguity is reasonable.
3. The court also noted that the intent of the parties could have provided grounds for coverage. There was evidence that Khurey indicated that the plane would be outside the continental United States for vacations on the application. Given this factual possibility, summary judgment was inappropriate.
iii. Beke: comparing these two cases is that Vargas represents an instant settlement by ins. co. because of reasonableness, by comparison, in Rusthoven, the $1.7 million is almost “mind boggling” and will indicate more litigation.
c. Honoring the Reasonable Expectations of the Insured [44cb] The following cases present a couple contracts where the language is unclear.
i. The objectively reasonable expectations of the insured will be honored even though the technical provisions of the insurance policy would have negated those expectations. Atwood v. Hartford Acc. & Indem. Co. (1976) [45cb, 10] 1. Atwood (P), and electrician, sought coverage for a negligence claim against him for completed work.
2. There are a number of ways to justify honoring the reasonable expectations of the insured.
a. One is that the insurer in some way has misrepresented what is in the policy;
b. Another is that the insurer is estopped to deny coverage because it has allowed the insured to labor under a misimpression about the policy’s contents.
3. The court also noted that there was evidence that Atwood’s (P) insurance agent believed Atwood (P) was covered for completed operations. The court stated that if an agent did not realize the extent of coverage, a lay person such as Atwood (P) couldn’t be expected to. The granting of coverage in such situations is based on both misrepresentation and estoppel theories.
ii. Ambiguity in an insurance policy is not required for application of the reasonable expectations doctrine. Atwater Creamery Co. v. W. Nat. Mut. Ins. Co. (1985) [49cb, 11] 1. Western (D) denied Atwater’s (P) theft insurance because there were visible marks of forced entry.
2. The court pointed out that ambiguity in the policy is not irrelevant using this approach. Rather, it becomes a factor in determining the reasonable expectations. The court also noted that it places a burden on insurers to communicate coverage and exclusions accurately and clearly.
III. The Role of Intermediaries [56-73 cb]
There are two different types of intermediaries: (1) agents (most cases and all of our purpose
luded in a policy remains
a. Insurance contracts may not provide for punitive damages coverage in Texas because of public policy considerations. Hartford Cas. Ins. Co. v. Powell (1998) [74cb, 15] i. Hartford (P) claimed that it couldn’t be held liable for punitive damages assessed against Powell (D) even though the insurance policy read will insurer personal injury “all sums.” [75cb] .
1. Punitive Damages (general definition)
a. Damages exceeding the actual injury suffered for the purposes of punishment, deterrence and comfort to plaintiff.
ii. Since the court found that coverage of punitive damages violated public policy, it declined to reach the question of whether it was excluded by the Hartford (P) policy.
1. Some jurisdictions do not follow the rule expressed here. The district court did not have a definitive Texas Supreme Court case guide it is so it had to make an “Erie guess.”
iii. Beke: Kansas and most states do not allow punitive damages for simple negligence. Remember, the line is negligence, reckless, and intentional, in that order. Most alcohol cases are either negligence and reckless, but not intentional. Over 12,000 deaths/year are alcohol related and cause most cases to fall into this “unclear” reckless but not negligent, thus creating many insurance question.
b. Providing insurance coverage of punitive damages is not contrary to public policy. First Bank (N.A.)—Billings v. TransAmerica Ins. Co. (1984) [81cb, 16] i. Transamerica (P) asserted that it should not be liable for coverage of punitive damages against its insured.
ii. The decision left open the possibility that this ruling could change under different circumstances. It stated that when the law of punitive damages is more certain and predictable, it may make more sense to follow other jurisdictions on this issue. This Montana decision is not in accord with the majority of states.
c. What Is Not Covered? [87cb] i. Most courts hold that insurance against intentional wrongdoing violates public policy.
1. The courts are split, however as to whether misconduct that is more blameworthy than “mere negligence”, but does not amount to intent to cause harm may be covered (punitive).
2. Most liability and property insurance policies contain express exclusions of coverage (or limitations contained in the insuring agreement itself) for harm that is intentionally caused.
a. The most common excludes coverage of harm that is “either expected or intended from the standpoint of the insured.”
d. Does the Policy Provide Coverage? [88cb] i. Where public policy does not absolutely bar coverage of liability for punitive damages, the courts are divided on the question whether a basic liability insurance policy that covers the insured against liability for “damages” covers liability for punitive damages.
The majority of the courts