Insurance Law Outline

Insurance Law, Fall 2012
I. Introduction
A. History and Functions of insurance:
1. Insurance = Minimization of Risk:
a) Risk-transfer: Transfer risk from risk-adverse to risk-neutral person.
(1) insured
(a) gives up a small risk of a large loss
(b) accepts large (100%) risk of small loss (premium paid)
(2) insurer
(a) accepts small risk of large loss
b) Risk-pooling: spreads the risk. (Diversification – whole risk is smaller than sum of its parts.)
(1) creates actuarial certainty by statistical analysis of overall risk
c) Risk-allocation:
(1) divides types of risks into categories
(2) assigns prices to different types of risk
2. On the assumption that there is a group of the same risk individuals:
a) Insurance turns “Unpredictable risk for individual” into “predictable risk for insurance company.”
b) However, each event of accident must be independent.
3. Value of Insurance:
a) Expected value of loss = P (probability) * L (amount of loss)
b) Attitude toward risk also counted.
MCA § 33-1-201. Definitions — insurance in general. For the purposes of this code, the following definitions apply unless the context requires otherwise:  (5) (a) “Insurance” is a contract through which one undertakes to indemnify another or pay or provide a specified or determinable amount or benefit upon determinable contingencies. 
(b) Insurance does not include contracts for the installation, maintenance, and provision of inside telecommunications wiring to residential or business premises. 
(6) “Insurer” includes every person engaged as indemnitor, surety, or contractor in the business of entering into contracts of insurance. The term also includes a health service corporation in the provisions listed in 33-30-102. 
4. Risk Management
a) Risk Control: methods
(1) Risk Avoidance: do not engage in practices with high risks
(2) Risk Reduction: use processes that reduce risks
b) Risk Transference: insure; practicing law without insurance is like running the Alberton Gorge without a life jacket
(1) risk distribution
(2) transference
c) Risk Retention: keeping part of the risk (not carrying collision coverage)
 
5. Insurance Terminology
a) Property/Casualty
b) Health & Life
c) First Party Insurance: covers the party paying premiums
d) Third Party Insurance: covers a third-party injured by the party paying premiums
B. Problem of Imperfect Information:
1. Adverse Selection:
a) parties facing higher risk are more likely to seek insurance than parties facing lower risk
b) balanced by: risk-averse parties also more likely to seek insurance AND create lower risk for insurer
 
2. Moral Hazard: tendency of any insured party to exercise less care to avoid an insured loss than would be exercised if the loss were not insured.
C. Addressing the Problem of Imperfect Information:
1. Breach of Warranty:
a) Strict Compliance Required: Warranty is condition precedent. If there is a breach of warranty, there is no contract, and it is all void.
b) Warranty clause has similar effect as exclusion/limitation clause in mechanism for denying coverage.
c) Because of harsh effect of breach of warranty, ambiguities are interpreted against Insurer by reason of Public Policy.
d) in case of doubt, representation will be found, instead of warranty
MCA 33-15-403 Makes most warranties a representation in all insurance applications.  The insurer can void it under subsections 2(a)-(c)
Vlastos v. Sumitomo Marine & Fire Insurance Company, 707 F.2d 775 (3d Cir. 1983), π Vlastos owned a building insured by Δ. Following a fire, π sued to enforce policy, which included endorsement that read “Warranted that the 3rd floor is occupied as Janitor's residence.” A massage parlor had occupied a portion of the third floor at the time of the fire. Trial judge had instructed jury that if a tenant other than the janitor occupied the third floor, the warranty was breached. 3d Cir. applied the rule that materiality of a warranty to the insured risk is irrelevant “if the fact is not as warranted, the insurer may deny recovery… [however] In case of doubt, courts normally construe a statement in an insurance contract as a representation rather than a warranty.” 3d Cir. ruled that the warranty applied to the facts at the time the policy was written, NOT at the time of the fire and ordered new jury instruction on that issue. Additionally, 3d Cir. found that the warranty was ambiguous as to whether or not the janitor occupied the third floor exclusively; also found that the purpose of the provision was more likely to ensure that a janitor, as a responsible person who could prevent fires or report them promptly, was on the premises rather than to ensure that ONLY the janitor occupied the third floor and NOT some other tenant who might create a higher risk of fire. 3d Cir. held that the only issue for the jury to consider was whether or not the janitor occupied the third floor at the time the policy was written.  Remember contract ambiguity is construed against the drafter.
2. in Montana, statements in the application are Representations, NOT Warranties
3. False Representations do NOT prevent recovery, UNLESS
a) material to
(1) acceptance of risk; or
(2) hazard assumed
b) fraudulent
c) insurer would not have issued policy
d) insurer have required different premium
MCA § 33-15-403. Representations in applications — recovery precluded if fraudulent or material. (1) All statements and descriptions in any application for an insurance policy or annuity contract or in negotiations for an insurance policy or annuity contract by or on behalf of the insured or annuitant are considered representations and not warranties. 
(2) Misrepresentations, omissions, concealment of facts, and incorrect statements do not prevent a recovery under the policy or contract unless: 
(a) fraudulent; 
(b) material either to the acceptance of the risk or to the hazard assumed by the insurer; or 
(c) the insurer in good faith would either not have issued the policy or contract or would not have issued a policy or contract in as large an amount or at the same premium or rate or would not have provided