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Insurance Law
University of Oklahoma College of Law
Travis, Rex

Insurance Law: Class Outline Travis Spring 2012
1-    Introduction
A.    The History and Functions of Insurance
Lots of litigation about what is and isn’t insurance. This makes a lot of difference b/c insurance is so highly regulated.
·        Function of Insurance
o   Risk Transfer- transfer risk from people who can’t afford it if have a disaster (risk averse).
o   Risk Pooling- spread among many participants.
o   Risk Allocation- charge a premium predicated on the risk that a particular person is exposed to.  Allocate risk based on likelihood of accident.
·        McMullan v. Enterprise, (2001)- OK
What is insurance?
A motor vehicle service contract is insurance,
It will support a bad faith case.
Make insurer do what they are supposed to do- deal in fairly and in good faith.
B.     The Problem of Imperfect Information
·        Adverse Selection- ‘sickies’ but insurance, well people don’t.
·        Moral Hazard- insured may cause the loss or not try to prevent a loss
·        Combating threats to Insurance Function
Beat the problems of adverse selection and moral hazard with warranties.
Court and legislatures do not like warranties.
1.     Breach of Warranty
Warranty- condition precedent to the contract. If not accurate then the insurance is void.
·        Vlastos v. Sumito Marine & Fire Insurance, (1983)- 3rd Circuit
Policy has a warranty that the 3rd floor is occupied by janitor closet.
There was also a massage parlor on the 3rd floor and living quarters for the janitor.
Fire causes loss, including death.
Insurer argues that the massage parlor increased the risk and denies coverage based on the breach of warranty
The warranty is ambiguous. Is the 3rd floor occupied only by the janitor or includes occupancy by the janitor?
Court holds ambiguities to be construed against the ins. Co.
Courts do not like warranties and will work hard to avoid letting them void policies.
o   Case Notes
o   Oklahoma Law
36 OS 3609: statements in applications deemed to be representations and not warranties.  Representations are a defense only if they are fraudulent and material (although cases say they must be both).
The difference between warranties and representations- warranties automatically void a policy (if found to be untrue). Representations do not automatically void a policy.
2.     The Transformation of Warranty Law: The Modern Law of Misrepresentation and Concealment
·         Introduction
·         Neill v. Nationwide Mutual Fire Insurance, (2003)-Arkansas
Insured says he accurately answered all the agent’s questions.  Agent inaccurately filled out application to omit prior losses. Agent puts no on the form. Agent wouldn’t have insured if knew of the prior losses. (Agent gets commission on premium, so inaccurately fills out form to get commission. Odds are high there may not be a loss for 2 years. After 2 years misrepresentation is not longer a defense.)
3.5 years later the home burns.
Insurer denies the claim based on misrepresentation.
Trial grants Ins. Co. summary judgment.
Appeals Court reverses- holding: Neill gave correct answers and agent wrote them down wrong. There will be a fact question which precludes summary judgment.
o   Case Notes
o   Oklahoma Law
Adopts same rule as Neill.
Oklahoma has similar statute to pg. 23 n. 3. Application is not admissible unless copy is attached to the policy. 36 OS 3609
·         Mackenzie v. Prudential Insurance, (1969)- 6th Circuit
Insured develops high blood pressure after application but before policy is delivered.
Application provided insured had to be in the same health at delivery for the policy to be affective.
Holding: applicant had duty to reveal information he knew as material. Ins. Co. doesn’t have to pay.
This case is atypical. Most courts will not follow this rule.
o   Case Notes
2-    Insurance Contract Formation and Meaning
A.    The of Standardized Forms
1.     The Policy Standardized Forms
2.     Construing Ambiguities Against the Insurer
·         Introduction
·         Vargas v. Ins. Co. of NA, (1981)- 2nd Circuit
Dr. buys aviation policy which provides coverage “within the US”.
Dr. crashes airplane while in route from mainland US to Puerto Rico by way of Haiti.
Ins. Co. denies coverage b/c outside of US.
Holding: summary judgment for Ins. Co. reversed. B/C 2 interpretations of “within US”. 1- on a flight between 2 points within the US (on a direct course); 2- literally within the US boundaries.
Two permissible constructions is ambiguous.
Ambiguities construed against the Ins. Co.
o   Case Notes
3.     Interpreting Binders
·         World Trade Center Properties, LLC v. Hartford Fire Ins., (2003)- 2nd Circuit
2 airplanes strike 2 towers as part of Single terrorist plot.
Is it 1 or 2 occurrences so as to trigger 1 or 2 policy limits?
Holding: fact question

s the agent owe when the agent had the authority but doesn’t place coverage. Ins. Co. gets only premium.
o   Case Notes
2.     Waiver and Estoppel
·         Introduction
o   Waiver- voluntary relinquishment of a known right.
o   Estoppel- conduct making it inequitable for Ins. Co. to take a particular position.
·         Roseth v. St. Paul Property & Liability, (1985)- S. Dakota
Insured tells adjuster he has all risk policy. Actually he only has mortality coverage.
Adjuster doesn’t correct him. Says mitigate loss. Insured sells injured cattle at a loss.
Turns out he has no coverage on the cattle so he bears a loss for the sale.
Insured claims ins. co. is estopped to now claim it has only mortality coverage.
Holding: No Estoppel.  Cannot create coverage by estoppel (majority rule), based on post contract conduct (minority rule).
There are exceptions
o   Case Notes
o   Oklahoma Law
Allen v. Allen definition of Estoppel-
 
 
 
 
 
3.     Group Insurance and ERISA
·         Introduction
o   Group Insurance
§  Advantages of group insurance
o   Lower administrative costs
Entity sponsoring the group plan (employer or organization) already does a lot of the record keeping.
Insurance company bears less cost administering the group.
o   Underwriting is improved
When ins. co. writes group, all members are well enough to work or to otherwise participate.
If a large enough percentage participate, ins. co. may not need to underwrite at all
§  After WWII- group health insurance offered as a fringe benefit to secure workers.
Govt began to encourage employers to provide health insurance as a way to forestall having to finance universal health coverage.
§  Employer deducts the cost but the employee doesn’t have to pay tax on the premium or the benefit.
§  Government has further tried to encourage offering health insurance by protecting employer health plans from suits and claims by ERISA.