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Insurance Law
Villanova University School of Law
Saiman, Chaim N.

Insurance Law Saiman Fall 2014
Unit 1: Contract Law Foundation
I.                    Introduction
a.       Actuarially correct price – price it should cost to insure this risk, given the chance it could occur
b.      Moral hazard
c.       Adverse selection
d.      4 conceptions of insurance
                                                              i.      Contract
1.      Individualistic conception
2.      Negotiated terms policy language central
3.      Only what was contracted for is part of the insured risk
                                                            ii.      Public utility
1.      i.e. gas/electric
2.      heavy regulation of terms/rates/exclusions
3.      gov’t to oversee for public interest
4.      auto/health for example
                                                          iii.      Product
1.      Opposite of a contract
2.      It is not about the language of the contract, it is about whether the insurance contract serves the purpose it was bought for (i.e. warranty of merchantability)
3.      Not what contract says, but the validity/reasonableness of what it says is the issue
                                                          iv.      Governance
1.      Influence policy/holder conduct via contract rather than government
2.      Questions about the degree to which an insurance policy company must give DP and equal protection to its policy holders
a.       Also how much cross-subsidization are we willing to have for a more egalitarian insurance market?
e.       Basic Structure of Insurance Law
                                                              i.      Types of insurance law
1.      Regulation of insurer & policy holder (contract & tort law- judicially developed)***
2.      Regulation of entities that provide insurance (statues & administrative law)
                                                            ii.      Types of Insurance
1.      First party – insurance co. will pay me if I suffers a loss (homeowners/health insurance, etc.)
2.      Liability insurance company will pay 3rd party if I cause 3rd party loss (insurance against a tort)**
II.                 Contract Law Foundations
a.       Insurance Contract Interpretation
                                                              i.      Contra proferentem (“against the drafters”) à instructs courts to interpret ambiguous insurance policies in favor of policy holders (First principle of insurance)
                                                            ii.      Gaunt v. John Hancock Mutual Life Insurance Co.
1.      Facts:
a.       Relevant passage August 3rd: “if the Company is satisfied that on the date of the completion of Part B of this application I was insurable…and if this application…is, prior to my death, approved by the Company at its Home Office, the insurance applied for shall be in force as of the date of completion of Part B” “Insurance effective: (Check date desired) Date of Part B….Date of issue of Policy…”
b.      P did not check one, but gave signed ‘application’ and first premium $$…solicitor for insurance co. checked second – trial judge found that both intended P to be covered “date of completion of medical exam” and checking 2nd one was a mutual mistake
c.       P was murdered prior to the Home Office issuing policy
2.      Learned Hand considered the phrase to be a condition precedent … the Home Office must approve/issue policy for insurance to come into effect – however, a lay individual may not understand the terminology of an insurance policy  — Treats insurance as a product
a.       Individual paid premium, passed physical – he would assume he was getting immediate coverage not waiting for insurance company to approve at their leisure
b.      Felt that the insurance company assuming a lay would understand an insurance policy was unpardonable
3.      Judgment for plaintiff
4.      Concurring (Clark)
a.       Concurs on a basis of fairness – not ambiguous terms
b.      Concurred b/c the insurance company acted in a manner that was ‘unpardonable’
c.       Felt that the course of negotiations required and controlled by insurance company was unpardonable
                                                          iii.      Principles of the Law of Liability Insurance
1.      New York rule: plain meaning state –if not ambiguous, then it’s not ambiguous & if not ambiguous then no extrinsic (external/parol) evidence admitted
2.      California rule – you have to allow extrinsic evidence to determine whether the K is ambiguous
3.      § 2 Insurance Policy Interpretation
4.      § 3 The presumption in Favor of the Plain Meaning of Standard Form Insurance Policy Terms p.38
a.        “reasonable policy holder”
b.      “Presumption may be rebutted by highly persuasive extrinsic evidence demonstrating that a reasonable person in this policy holder’s position would give the term a different meaning under the circumstances…”
c.       “term in relation to claim at issue”
d.      “plain meaning presumption”:
                                                                                                                                      i.      § 3 rejects the plain meaning’s absolute preclusion of extrinsic evidence regarding meaning of policy term – extrinsic evidence is admissible to show the meaning of a policy term that is unambiguous on its face, but the term must be susceptible to alternative interpretation
e.       “relation of the presumption to ambiguity determinations”
                                                                                                                                      i.      If a policy term is unambiguous on its face, then extrinsic evidence may be admissible to show that the term has a different meaning in context
                                                                                                                                    ii.      Where there is plain meaning, the party seeking to avoid that meaning bears the burden of persuasion, and that burden is higher than in the case of an ambiguous term: extrinsic evidence must be highly persuasive
                                                                                                                                  iii.      Where there is no plain meaning, the drafting party bears the burden of persuading the court that its preferred meaning is more likely to be the meaning that a reasonable policy holder in this policyholder’s position would have given the term under the circumstances
f.       “reasonable policyholder and the reasonable person in this policyholder’s position”
                                                                                                                                      i.      Plain meaning of an insurance policy term is the understanding of the term that an ordinary, reasonable person would have if that person took the time to read all of the relevant parts of the policy in the context of the claim at issue, without taking any other circumstances into account
5.      § 4 Ambiguous Terms
(1) an insurance term is ambiguous if it does not have a plain meaning, as defined in § 3, when applied to the liability claim in question.
(2) an ambiguous insurance policy term is interpreted in light of all the circumstances to determine the meaning that a reasonable person in the policyholder’s position would be most likely to ascribe to the term under the circumstances. The meaning must be one to which the language in the terms is reasonably susceptible.
(3) if, the court is unable to determine the meaning of an insurance policy term using all permissible sources of meaning, the term is interpreted against the party that drafted or supplied it
a.       Relationship to reasonable expectations
                                                                                                                                      i.      Insurance policy terms are to be interpreted according to the reasonabl

rance contracts will be honored even though painstaking study of the policy provisions would have negated those expectations
                                                                                                                                  iii.      Policy holders shouldn’t be bound to unknown terms beyond reasonable expectations
b.      Implied Warranty Breached by Insurance Co.
                                                                                                                                      i.      Provisions should be made known
                                                                                                                                    ii.      Insurance is a ‘product’
1.      Policy that doesn’t cover burglary based on burglar’s skill (ability to get in undetected) is a product defect
c.       Unconscionability
                                                                                                                                      i.      Public policy argument
                                                                                                                                    ii.      This agreement is so substantively and procedurally unfair that it should not be enforced
                                                                                                                                  iii.      As a matter of law, you can’t do this (last resort for courts…judges don’t like to jump on board with this)
4.      Dissent:
a.       Policy language says X, he bought it
                                                            ii.      Group Discussion
1.      Safest version (best bet for getting judges on board)
a.       Reasonableness
b.      Exclusions built into exclusions & not definitions
2.      Colloquial standard of burglary (someone breaking in)
                                                          iii.      Align purpose w/ policy language  
c.       Typical Policy:
                                                              i.      Insuring Agreement
                                                            ii.      Exclusions
                                                          iii.      Definitions
III.               Waiver & Estoppel
a.       Waiver:
                                                              i.      party voluntarily & unilaterally relinquishes a known legal right
                                                            ii.      may be express or implied and party waiving right must (1) be aware of the right being waived and (2) intend to forgo the right
                                                          iii.      A party to an insurance policy waives a right under the policy if that party:
1.      With knowledge of facts giving rise to that right,
2.      Expressly relinquishes the right; or
3.      Engages in conduct that would reasonably be regarded by the counter party as an intentional relinquishment of that right (i.e. the insurance company cashes a late-payment check..)
4.      And the waiver is communicated to the counter party  (i.e. the insured sees that late payment check has been cashed)