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Insurance Law
University of Mississippi School of Law
Percy, E. Farish

Types of Insurance

Property / Casualty

i. Lines of Insurance: med mal, product liability, homeowner’s multiple peril

Life & Health

Types of Insurers

Stock Company

i. May be publicly traded

Mutual Company

i. Insurers own company (Med Mal in MS)
ii. Insurers get surplus

Function of Insurance

Risk Transfer

i. Ex:
a) 1% chance of suffering $10,000 loss = $100
b) 10% chance of suffering $1,000 loss = $100
ii. insured is more likely to buy (a) b/c a big ticket item
iii. risk neutral would have no preference
iv. risk average person would prefer latter and might pay more to transfer the risk in (a)

Risk Pooling

i. Taking large number of small risk and putting them togeather
ii. By insuring many insureds, insurer can more accurately predict the risk pool thus reducing the cost to each

Risk Allocation (diversification)

i. Insurers attempt to classify the risk posed by the insured and price the coverage accordingly
ii. Ex: Teenage male is at higher risk

Problems Caused by Imperfect Information

Adverse Selection

i. Improper allocation of risk b/c insurer doesn’t have proper information to classify risk
ii. Low risk insured opt out leaving disproportionate amount of high risk insured

Moral Hazard

i. Ex: Driver is less cautious b/c they know they are insured

Method of Addressing Adverse Selection & Moral Hazard

Length application / screening process to determine degree of risk & screen out those who pose too much risk
Classify insureds according to risk & set premiums accordingly
Experience rate when policy is renewed (Up premium if bad performance)
Higher Deductibles, Co-insurance
Limit Coverage
Exclude unusual risk

Questions to Ask:

Is the policy trying to promote its function?
Is the policy trying to prevent problems?

Warranties

Common Law: strict compliance required; any breech voids coverage

i. If insured breeches warranty, policy is void
ii. If term is a representation, the representation must be material

Judicial method of mitigating harsh effects

immaterial reps
b. Insurer must prove they would have:
i. increased the premium
ii. altered level of coverage
iii. denied coverage
c. Prevents insurer from voiding policy if they knew that the rep. was false (ex: learning info. from another source)
d. Insurer might have a duty to investigate a falsity, especially where:
i. insured possibly misunderstood the question
ii. agent knows the representation is false

Ward v. Duhram

§ Agent asked questions & completed app.; insured told agent truth but agent changed answer telling applicant “more than 2 years ago…you won’t be turned down”; insured signs
§ Rule: Knowledge by the agent is imputed to the insurer absent collusion
o Jury decides
§ Court: No collusion if applicant was fraudulently induced
o Distinguished from case where agent says “I think I can get you by” & case where applicant signed without reading and wasn’t fraudulently induced (both cases were collusion)
MS Law: