Insurance Law Outline

Insurance Spring 2008
Prof. Baron

· Many different definitions of insurance exist from state to state, however, the definitions share two significant requirements 1) a risk of loss, described as a “contingent or unknown event” or a “fortuitous event” and 2) a distribution of the risk among similarly situated persons.
· Those definition alone, don’t necessarily fit a contract w/in the broad insurance spectrum – 2 further inquiries must be made 1) how do the specific transactions involve one or more of the evils at which the regulatory statues are aimed, and 2) are the “risk” elements essential or merely incidental to the other elements involved?

“Insurance is one of the principal sources of fuel for the litigation system.”

Insurance is regulated by the States (the State Division of Insurance)—if what you do is considered insurance, then you will be regulated by the State Division of Insurance. Main purpose of the DOI is to ensure that insurance companies can pay their claims (have adequate reserves, well capitalized, etc).

Insurance = risk sharing. Also defined as an arrangement for transferring and distributing risk. If this definition is met, then approval is needed by the company from the division of insurance.
Insurance = a contract where one undertakes to indemnify another against loss, damage or liability caused by an unknown or contingent event. (Life insurance is an exception to the insurance definition. You know are going to die, it is just a matter of time.)

Risk =Risk is a rational device for managing ignorance. Ignorance is not knowing what is going to happen in the future to cause a loss. You never know when you are going to have a loss. Risk could cover a “bundle of risks” or an individual risk such as “hazard or peril” or it could be an aspect of risk. Ignorance is the point of beginning for insurance.

Consider guy who gets hit by a car. He suffers risk of bodily injury, risk of property damage, loss of income, loss of consortium, etc. These risks can be managed in a bunch of ways, such as health insurance, disability insurance, property insurance, sick leave offered by ER. All of these risks can be anticipated and can be assigned to someone else.

Collateral Source Rule (AKA collateral benefits rule). Tortfeasor is still liable for the full extent of damages that he has inflicted on the plaintiff, even if the plaintiff receives compensation from collateral sources (i.e. is fully compensated by insurance). The plaintiff is always held responsible for the damage he inflicts. The Tortfeasor should not benefit from money the victim receives.
· Jurgensen v. Smith, 2000 South Dakota 73, 611 NW2d 439. Upheld Collateral Source Rule—3/2 Decision
· In SD, the only TF to benefit from the collateral source rule is doctors.
· A.L.P.S. – Attorney’s Liability Protection Society – formed by SD bar to protect smaller states – integral to operation of state bar in SD.
Forms of Risk Management:

Risk Control or Avoidance—this is to make enterprises safer (this involves safety inspections, putting whistles on vehicles when they back up).
Traditional Insurance. This is the transfer and distribution of risk over a pool.

Total Premium =

i. Pure premium—Insured’s proportionate share of total losses
ii. Reserve—the amount of money that needs to be set aside in case the insurance company has a bad year.
iii. Costs of running the insurance company—staplers, paper clips, pens,.
iv. Business/Sales commission—salary of the insurance sales agent.
v. Profit

Re-insurance—insurance sold by one insurance company to another insurance company—this is a way to spread the risk of loss. Re-insurance covers all claims in the pool over a specified dollar amount.

i. Traditionally re-insurance was for insurers that had a small pool and felt they had some exposure to catastrophic losses.
ii. This reinsurer premium is passed right along to the consumer.

Insurance transactions are all done in the future—you pay a premium up front and you are then covered for (x) amount of months later. Regardless of how big of a loss there is, the insurer makes an unconditional promise to pay. If you have unusually high claims—the future rate payers suffer the impact of high claims, not the existing rate payers.
Reserves—There should be money on hand to pay the claim or loss.

i. Once reserves are created, if they are not utilized—then they are turned into profit for the insurance company.

Notice requirements are put into every policy—you have to contact the insurance company within 24 hours of the loss.

i. Look at how the notice requirements affect the risk—How has the violation of notice requirement affected the traditional definition of Insurance. Look at if the risk is affected.

The larger the pool— the better to keep the premium down.

i. Larger pools allow actuarial estimates to be more accurate.
ii. Larger pools reduce administrative expenses per customers (efficiency).

Reciprocal Insurance—an agreement by a number of people to share losses. An attorney at fact is the person who administers this reciprocal insurance. No one pays a premium up front, but all parties share in the losses as they occur.

i. The attorney at fact has to comply with regulations.

Adverse Selection— occurs whenever potential insureds are treated alike irrespective of some factor that differentiates them as insurance risks. This occurs when a higher risk party is introduce into a pool causing the lower risk parties to suffer from increased premiums.

i. Ideally, high risks candidates will be put in a higher risk pool.
ii. This happens in the area of term life insurance polices—you have to submit to a physical and make sure you are not going to die right away. Once you get on a term life policy, it is automatically renewed. In the renewal of term life insurance, adverse selection sets in because the higher risks can’t get insurance elsewhere so they stay in the pool.

Risk Retention/Self-Insurance

Under this system, you set aside assets that match the pure premium over a period of time into a reserve.
Generally only used by larger companies.
Under this you avoid a major percentage of the premium that you would normally have to pay. This is because your only cost is the cost of the pure premium, you don’t have to pay the ins co’s overhead.
Some types of self-insurers are regulated by the State. The State makes sure you have enough money to pay the losses.
Banks and mortgage companies might require that if you self insure you get traditional insurance also.
The IRS will not consider the money put into the reserve as business expenses, causing tax deductions to be forgone.

Griffin Systems, Inc. v. Ohio DOI
Griffin offered vehicle protection plans. The VPP only protected against defects of the vehicle (warranty) and didn’t create indemnity against unrelated perils. Sued by OH Dept of Ins saying these were insurance and they didn’t comply with ins. rules. Found for Griffin.

Court holds it is not insurance, but it is a warranty. A warranty promises indemnity against defects in an article sold, while insurance indemnifies against loss or damage resulting from perils outside of and unrelated to defects in the article itself. The Court held that status should not be taken into consideration.
The Dissent (Roger—thinks the dissent is right) says that Griffin was not the manufacturer of the parts and therefore if there is a claim, Griffin pays out money to the injured party—they don’t just fix the problem with parts on hand, because Griffin does not have parts on hand. Griffin also reinsured itself with another insurance company. The fundamental purpose of insurance regulation is to make sure that the insurance company can pay claims.
This case is the minority view. Elements as distinguishing characteristics of insurance are:

i. K between an insurer and insured which exists for a specific time period.
ii. An insurable interest possessed by the insured.
iii. Consideration in the form of a premium paid by the insured.
iv. The assumption of risk by the insurer.

Baron thinks that the status of the party (manufacturer, independent third party) is of consequence, contrary to the majority opinion. When it is the manufacturer or seller that gives the VPP, then they are just guarantying the quality of the product.
Look at supplement pg 5—South Dakota Supreme Court holds the following as insurance:

i. Sheriff’s bond
ii. The bond on an assistant bank cashier
iii. Title Option Plus being sold as an alternative to Lender’s title insurance policy
iv. Vehicle Protection Plans—they are generally considered to be insurance unless they are in the nature of warranties by the seller or manufacturer.
v. SDCL 58-1-3(3) specifically excludes motor vehicle service contracts from regulation.

Truta v. Avis Rent A Car System, Inc.
The Defendants are the car rental agencies. The scrutiny is over CDW (collision damage waiver)—the agency pays up to $1,000 damages no matter whose fault the accident is. The CDW is a valid contract.

The plaintiffs thought the CDW was insurance and the charges were excessive and unconscionable. The plaintiffs wanted the rental agencies to be regulated as an insurance company because then prices would be controlled.
The Court held that the CDW was not insurance, because the lessor is not agreeing to pay anybody anything, but is simply agreeing not to hold the lessee liable, there is no need for accumulating reserves. In this situation there is no need for money to be on hand in a reserve to pay a claim.
All insurance Ks concern risk transference, but not all Ks involving risk transference are insurance. Even in those states that have the broadest statutory or decisional definitions of insurance, which if literally applied would include all or nearly all Ks transferring risks, many arrangements encompassed w/in the scope of such definitions still are not treated as insurance transactions in legal contexts.
The primary purpose of the K was to rent a car, not purchase insurance.
This is majority rule.

· Two other types of Tx that might not be deemed insurance: p.17 “If the situation were such that the lessor was agreeing to pay any monies to third parties, then this conclusion would be different. Such an agreement would be similar to the type of coverage which has been extended by some companies in the past to reimburse for expenses incurred by an individual as a result of a deductible provision. Paying law firm continual monthly retainer is not insurance for medical malpractice claims.
Notes on p. 20:
#3: Orange County Water District v. Assoc. of CA Water agencies – Joint Powers Insurance Authority: CA App – concluded a self-ins. pool, arranged through a joint powers agreement didn’t constitute “insurance” and that “a self-insurer doesn’t contract to indemnify another.
#4: Three General Categories of Insurance: (in this book)
1) Insurance covering liability 2) Insurance covering property and economic losses 3) insurance covering personal concerns including life & disability. The most common form of insurance are auto & homeowners policies
#5: Life Insurance: A “little bit of life insurance might escape regulation” i.e. merchant promoting installment pmnts on furniture cancelled upon death of the customer. However, some fraternal benefit societies life insurance for members may not be but Modern Woodmen is an example of one that is regulated.
#6 Automobile Insurance: Not confined to protection against liability but expanded to feature other coverages including collision coverage (the insurer’s agreement to reimburse the insured for loss to his motor vehicle), comprehensive, medical payments, and other varieties of coverage. Many states have law requiring demonstration of financial responsibility for auto accidents. Since some motorists won’t buy liability insurance at all, state often statutorily require insurance and some require “uninsured motorist” coverage. Some insurers also provide “underinsured motorist” coverage.
#7 “No-Fault” Legislation: New York’s No-Fault Scheme: (as described in Goodkin v. US)
ØNo-fault laws were created to remedy the inability of the tort system to rapidly, adequately & fairly compensate victims of auto accidents
ØProvides plan for compensating victims w/out regard to fault.
ØTwo limitations on recover: 1) a covered person cannot recover against another covered person for basic economic loss 2) a covered person who has not sustained serious injury cannot recover against another covered person for non economic loss

Chapter 1 Governmental Regulation of Insurance
Ø Insurance is regulated by the states. SDCL Chapter 58 regulates insurance in SD.
Ø SDCL 58-24-1: gives purpose of insurance regulations. Wants companies to have cooperative action among insurance rates among insurers. This type of thing is prohibited by anti-trust laws, but we get around it by statute. The idea is that actuaries need the most information possible to make good predictions.
Ø In South Dakota the division of Ins. oversees 60-64 domestic insurance companies,1400 or 1500 that are out of state companies, and 10,000 agents.. The staff is 30 FT employees and 3 to 4 lawyers.
Ø Purpose of insurance regulation:

Protect consumers
Regulate company reserves
Guarantee solvency of company
§ 58-24-5: “Rates shall not be excessive, inadequate or unfairly discriminatory.” This is very broad. The main purpose of regulation is not to protect consumer from price-gouging.
§ 58-24-10: Every such filing shall state the posed effective date, and shall indicate the character and extent of coverage.

Ø There is also statutorily imposed conditions and restrictions on policies such as: omnibus clause, fire insurance, UIM protection. In cases like these, the legislature may require an ins co to sell a particular line of insurance as part of another policy or in order to allow it to do business in the state.

Three ways a DOI can regulate rates:
i. The division of insurance actually sets the rates. This is uncommon. (TX & maybe CA)
ii. Prior approval—when an insurance company wants to set new rates they have to file for those rates and wait for approval. SD and most states use this system.
iii. File and use—an insurance company files for new rates and the day it files is the day it can start to use that new rate.

Agent Liability
Wilson v. All Service Insurance Corp.
P sues broker because ins co that broker picked ended up being insolvent and couldn’t pay claims. Summary Judgment for broker.

Broker does not have to investigate the Ins. Co. to make sure it is solvent; that job falls on state DOI. The DOI had the right to inspect books, look at ongoing liabilities, expenditures, etc.
All that broker needs to do is make sure that the ins company is approved to do business in the state.

Ø Aesoph v. Kusser: supp. p. 17. Agent tells guy he isn’t eligible for crop insurance, and he is wrong, broker is liable. He wasn’t under a duty to make s