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.
trine. 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 purposes); (2) brokers: representing insured to find best insurance.
a. The Authority of the Agent [57cb] i. An insurance agent acting with apparent authority can bind coverage although there were private, undisclosed limitations on the authority. Elmer Tallant Agency v. Bailey Wood Products, Inc. (1979) [58cb, 12] 1. Tallant (D), an insurance agent for Zurich (D), bound coverage for Bailey Wood (P), although Zurich’s (D) rules required prior approval.
2. Zurich (D) conferred apparent authority in the present case by allowing Tallant (D) to act as a general agent. The construction of liability in this case protects the insureds, who rely upon agents for their insurance needs. If Tallant (D) had told Bailey Woods (P) that there was coverage, but had not sent on the application to Zurich (D), it would have been directly liable to Bailey Woods (P) for breach of contract.
ii. Clothed With Authority [62cb] If most general agents have unrestricted authority to bind coverage, does the custom and practice of the industry make limiting apparent authority impossible? The reports are full of decision on this issue; the