Insurance Law Outline

1. Insurance, Law, and Society
I. Risk and Insurance 101
A) Terms
1. Risk – Something that can happen. Ins addresses bad things that can happen.
a. A person, property, or enterprise that is insured, and
b. The possibility that something can harm that person, property, or enterprise
2. Risk Transfer – A transaction or institutional arrangement that transfers, or shifts, risk from one person or entity to another. Most transactions of all types transfer some kind of risk.
3. Risk Spreading – Occurs whenever an entity takes on risk and parcels it out to a group of people.
4. Risk Aversion – Nearly universal preference for certainty over uncertainty with regard to future losses.
5. The law of large numbers – We can be more certain about the future experience of large groups in the aggregate than we can be about the future experience of any particular individuals in that group.
a. Corollary – ICs protect themselves within this rule through diversification in risk levels within a type of risk and in different risks.
b. Diversification – Spreading risk amongst those who seek coverage for it as well as spreading types of risk in order to spread their potential exposure to risk.
6. Times of rapid legal, tech, or social change place stress on ins institutions.
B) Nature and Function of Insurance
1. Insurance law is primarily controlled by state law and is considered consumer law
2. Ins law is primarily designed to protect the policyholder, not the companies
3. Choice of law and court is very important/determinative to the outcome of cases
4. State law -> many different interpretations of the same thing
C) Policies usually have 3 parts
1. Coverage Grant
2. Exclusions – Acts/Circumstances not covered
3. Condition
II. Beyond Risk Spreading – Economic problems hinder the ability to spread risk.
A) Moral Hazard. The theoretical tendency for ins to reduce incentives (1) to protect against loss or (2) to minimize the cost of a loss. Those with ins may be less careful, or even commit crimes to get ins payments. Ins Cos can combat this by:
1. Contracting on care – Requiring insured to do, while insured, just what they would do if they weren’t.
2. Community of fate – Make the insured feel some of the pain. One ex: deductibles -> put some risk back on the policyholder
3. Design ins Ks so that risks that pose a very high degree of moral hazard are not covered or covered less. ex: those things over which the insured has the greatest control.
4. Experience Rating – Premium is based on the past history of the customer
5. Retroactive Premiums – Charge more if the claims go over a certain amount
6. Coinsurance – Policyholder pays a % of any loss
B) Adverse Selection. The theoretical tendency for high-risk people to be more interested in ins than low-risk people.
C) Secondary Risk Spreading
1. Loss prevention – Once an ins co. assumes responsibility for the financial consequences of a given harm, it has a substantial incentive to prevent that harm -> Underwriters Laboratories
2. Gate keeping – The necessary/practical requirement of ins for almost all activity places ins cos. in the role of gatekeeper for large sectors of the economy -> requiring applicants to have perquisites to get insurance (bonds, solvency, assets)
3. Social stratification – In effect, people who cannot get types of insurance occupy a different social position than those who can get insurance, and people who have to pay more for insurance have fe