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Insurance Law
University of Toledo School of Law
Boyd, Nathan R.

Insurance Law


Spring 2012

o 1h Essay—Issue Spotting, do IRAC, but do not do in-depth analysis

Our essay will have 3-4 issues to spot and talk about

Talk about K interpretation;

o 1 h of multiple choice; 30 questions, 2 minutes per question.

1. Creating the Relationship & Insurable Interest

a. The purpose of insurance is to prevent risks and make the person whole

b. § 30. The Process of Contract Formation: An Overview . . . . 199

i. Step 1: Initial contact between consumer and the intermediary

ii. Step 2: the submission of application

1. The applicant or the agent may fill out the application

2. Usually the agent will fill in the application for you, so the always check what is written to make sure it is an accurate description of what you said/want

a. Errors could void the policy.

3. Elements of misrepresentation:

a. untrue or misleading: does not have to be intentional

b. Materiality

c. Reliance: The insurer relied on the information and was induced to issue the policy.

i. If the insurer knows that the misrepresentation was a mistake then reliance is unreasonable.

iii. Step 3: Issuance of binder


a. A temporary K

b. Immediately following the application for insurance

c. Prior to receiving official authorization to issue insurance

i. To “bind” you for now… (if there is coverage with a binder, that’s the K that will control. )

ii. It’s a separate contractual agreement

d. Obligates the insurer to pay insurance if a loss occurs before the insurer acts upon the application

i. Practicality of issuing a policy on demand

e. Binder must meet all requirements for forming a contract: mutual assent, consideration, sufficiently definite.

f. binder terminates upon the issuance of the policy or rejection of the application

g. Defenses: those defenses which are good against coverage are also good against binders

2. Binders include:

a. name of insured,

b. description of what is insured,

c. description of coverage,

d. the risk insured against

e. limits on proceeds

f. date and time the coverage begins,

g. duration of the coverage,

h. the premium amount owed,

i. the max time the binder will be in effect

j. statement that the binder terminates upon the issuance of the policy or rejection of the application, whichever occurs first, and

k. a statement that the terms and conditions of the policy to be issued are incorporated into the binder

3. The binder obligates the insurer to pay the insurance if a loss occurs before the insurers act upon the application

a. Always get something in writing because the insured is usually not covered until the application is accepted.

b. Also, one should always request this to identify what you have paid for.

4. Would the agent or a broker bind the coverage? i.e., do they give you instant coverage?

a. Most of the times you will not run into it in practice

b. Some agents might not be able to issue a binder and the policy will not be effective until they send you the coverage.

iv. Step 4: evaluation of the application by the insurer

1. Investigations by the insurer

2. Depends on type of coverage and the insurance company as to how far it will go.

v. Step 5: insurer issues the policy

1. And delivers the policy

2. The policy is retroactive to the date of the application

3. Payment of the premium is more important, delivery of the contract is more of an end point. Delivery is the act of putting the insurance policy into the possession of the insured

c. § 31 The Legal Requirements for Forming a Contract . . . . 201

i. Ins policy is nothing else than a K

1. Offer + acceptance

a. Most of the times, these are not an issue

b. Might become an issue in a life ins K

ii. Contract: a promise or a set of promises for with breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty

1. K requirements:

a. complete offer and acceptance

b. give consideration to each other to support the other’s promise

c. possess capacity to contract

d. satisfy any applicable writing requirement, and

e. contract for a purpose that is not contrary to public policy

iii. [a] Offer and Acceptance . . . . . . . . . . . . . . . . . . 201

1. Applicant in his application usually makes the offer,

a. insurer accepts or rejects

2. Offer is revocable by the applicant at any time before acceptance

a. in most instances law requires that an insured gets ten days to rescind after acceptance, (a deviation from the common law of contracts)

b. Statutes usually give applicant a period to rescind after the policy is delivered; Statutes and regulations give consumers a power they do not possess at common law, to void a contract after the mechanics of offer and acceptance have been completed.

3. In some instances a mass mailing can be construed as an offer and filling out an application an acceptance

4. If insurer responds with a policy that has different terms this is a counter offer, then applicant then has the power to accept or reject

a. E.g., Counteroffer if the ins co comes back with a higher premium

5. Ohio has the law that the policy cannot change for the first 2 years…

iv. [b] Consideration . . . . . . . . . . . . . . . . . . . . . . . 204

1. The consideration supporting the insured’s promise to pay premiums is the insurer’s promise to pay proceeds if certain events occur,

2. The consideration supporting the insurer’s conditional promise to pay proceeds is the insured’s promise to pay premiums and to perform other duties in the event of a loss

3. Initial payment of premium: the insured does not have to make an initial payment of premium in order to make the contract valid, but a contract can include a provision requiring that an initial premium payment to be made

v. [c] Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . 205

1. contracts are voidable at the option of infants, and the mentally incompetent

2. intoxication: person who’s intoxicated at the time of signing can invalidate contract unless the other party had no knowledge

3. persons under guardianship have no ability to enter into a contract

4. These principles of contract law can be modified by state law

vi. [d] The Writing Requirement . . . . . . . . . . . . . . . . 205

1. oral insurance contracts can be enforceable if they show parties’ mutual assent on certain terms

2. need to be sufficiently specific to show the parties’ mutual assent on certain core terms:

a. subject matter,

b. the risk insured against,

c. the premium,

d. the duration of coverage,

e. policy limits,

f. and identities of the parties

3. Statutes of frauds:

a. Suretyship: an oral contract of guaranty insurance is not unenforceable under the statute of frauds

b. One year: almost all insurance contracts could be completed in one year, with exceptions for guaranteed renewals and unlimited payouts

i. One-year provision requires contracts that cannot be performed within a year to be in writing. To extent either party has the right to terminate the contract prior to passing of a year, contract is one of uncertain duration and therefore need not be in writing

c. Life insurance statutes: some states require an agreement which is not to be performed during the lifetime of its promisor to be in writing

vii. [e] Public Policy . . . . . . . . . . . . . . . . . . . . . . . . 207

1. Insurance policies in general are not against public policy, but some specific rules invalidate insurance contracts in specific instances

2. Contracts against public policy won’t be enforced. Public policy is more often consulted for the purpose of determining the scope of coverage

d. § 32 Some Troublespots in the Process of Contract Formation . . . . . . . . . . . . . . . . . . . . . . . . . . . 209

i. [a] Insurer’s Delay in Responding to the Application . . 209

1. Applicant is at risk when application under consideration.

a. When ther

loss if that particular thing was destroyed?

2. interest which the law requires the owner of an insurance policy to have in the thing or the person insured

ii. Insurable interest is only important to the insurance company

1. The insurance company cares if a person has a interest in that which is insured b/c they want the person to have an incentive in the item insured so there is not intentional destroying of it

2. This whole idea comes down to whose risk is it and how does it affect the premium rate based on that risk

iii. Purpose of creating the Doctrine:

1. Stop people from wagering on the happening of a loss (Discourage the practice of using insurance as a device for gambling or wagering)

2. Prevent people from purposefully causing a loss (Remove incentive for destroying the insured object)

g. § 41 Relationship of the Insurable Interest Requirement to the Principle of Indemnity . . . . . . . . . 277

i. indemnity requires that insurance co. reimburse for a loss, and nothing more, and as such is violated if the insured is paid for loss they did not personally incur

h. § 42 Property Insurance and the Insurable Interest Requirement . . . . . . . . . . . . . . . . . . . . . . . . . . 278

i. generally, the insurable interest must exist only at the time of loss, which is all that is necessary to conform with the policies of the indemnity principle

1. Goods subject to a sale: the UCC states that a buyer of goods obtains an insurable interest when the goods are identified to the contract

ii. What is the proper test for an insurable interest in property?

1. There are 2 tests:

a. Legal interest test: three kinds of interests: (1) property, (2) contract, or (3) legal liability (see below)

b. Factual expectancy test: the expectation of economic advantage if the insured property continues to exist, or the expectation of economic loss accruing upon damage to the insured property (Broader than the Legal Interest Test)

iii. [b] The Legal Interest Test . . . . . . . . . . . . . . . . . 283

iv. One of the following must exist:

1. Property Rights

a. Legal or equitable title of virtually any nature and quality will satisfy the insurable interest requirement

i. No contingencies

1. But future interest will do

ii. Voidable or void interest can be insurable interests if the insured reasonably believes that the title is valid

iii. Because shareholders of corporations, joint tenants, spouses in community property, etc. all hold interest in something, they meet the test

2. Contract Rights

a. One whose contract rights depend directly on the continued existence of property has an insurable interest that will support a policy of insurance on that property

3. Legal Liability

a. A person has an insurable interest in property if he would suffer a legal liability in the event that the property was lost or damaged

i. § 47 Life Insurance and the Insurable Interest Requirement: Some Troublespots . . . . . . . . . . . . . . . . . 309

i. insurable interest must exist at the time the contract is made and the lack of interest at the time of the insured’s death is irrelevant.

ii. the owner of the life insurance policy must have a sufficiently close relationship by blood or operation of law to establish insurable interest