Insurance Law

Misrepresentation, as a matter of law (De Smet)

"A misrepresentation 'in an application for insurance is material to the risk if it is such as would reasonably influence the decision of the insurer as to whether it would accept or reject the risk.'" Is materiality a question of fact or of law? Here, law. Per court, question of LAW where "there are misrepresentations in the answers of the applicant to the questions in such application [attached to and made part of the contract], and it appears from the record that reasonable minds could not differ on the question as to whether the matter misrepresented increased the risk of loss"

"Binder"

"A written memorandum of the important terms of contract of insurance which gives temporary protection to insured pending investigation of risk by insurance company or until a formal policy is issued."

Langwith v. American National General Ins. Co. Duty of An Agent Factors

"Circumstances" that can be considered may include: -Nature and content of insured-agent discussions -Prior dealings of the parties -Sophistication of the insured -Agent holding out as a specialist or being paid for extra services NOTE: The insured ("client") bears the burden of showing an agreement to go beyond the general duty to simply obtain the coverage requested Do you agree that there is enough here to find that the agent had assumed a DUTY to advise the insureds regarding Ben's coverage under the umbrella policy? What about the insureds' responsibility to read their declarations page?

Insurance policy interpretation

"Plain meaning" Policy is read as a whole - all terms are supposed to be given effect Provisions granting coverage ("insuring agreement" are broadly construed, while exclusions or limitations are narrowly construed KEY - If Ambiguous provisions construed against the drafter (i.e., insurer) - called "contra proferentem." The effect is that ambiguous provisions are construed in FAVOR of coverage. "Ambiguous" - reasonably capable of being read with more than one meaning

Langwith v. American National General Ins. Co.

"Umbrella policy"? Insureds sued AGENT Fitzgerald, alleging she breached duty of care owed to them "by (1) failing to disclose that the driver exclusion in the umbrella policy continued after Ben's license was reinstated, and (2) failing to advise the Langwiths that Dennis could avoid all personal liability for Ben's driving by transferring title to the Suburban to Ben" Summary judgment on both counts for agent and insurer - insured appealed - What result? REVERSED on ground (1) Affirmed on ground (2) What about prior decisions relied on by the trial court? "[T]he import of our decisions in Collegiate Manufacturing Co. and Sandbulte was to limit an insurance agent's obligation to procurement of the coverage requested by the client, relieving the agent of any duty to advise his client of the kinds and amounts of insurance that would protect his client's insurable interests unless there was evidence of an expanded agency agreement." Held: "[W]e hold that it is for the fact finder to determine, based on a consideration of all the circumstances, the agreement of the parties with respect to the service to be rendered by the insurance agent and whether that service was performed with the skill and knowledge normally possessed by insurance agents under like circumstances."

Misrepresentation, Intent to Deceive

"a false representation as to a material matter in an application for insurance, even absent a showing of an intent to deceive, renders the policy voidable"

All statements and descriptions in any application for an insurance policy, certificate, or annuity contract, by or on behalf of the insured or annuitant, shall be deemed to be representations and not warranties. No misrepresentation, omission, concealment of fact, or incorrect statement prevents a recovery under the policy or contract unless:

(1) Fraudulent or an intentional misrepresentation of a material fact; or (2) Material either to the acceptance of the risk, or to the hazard assumed by the insurer; or (3) The insurer in good faith would either not have issued the policy or contract, or would not have issued it at the same premium rate, or would not have issued a policy or contract in as large an amount, or would not have provided coverage with respect to the hazard resulting in the loss, if the true facts had been made known to the insurer as required either by the application for the policy or contract or otherwise.

principles of insurance contract interpretation (questions of law for the court):

-"Plain meaning" rule Policy is read as a whole - all terms are supposed to be given effect -Provisions granting coverage ("insuring agreement" are broadly construed, while exclusions or limitations are narrowly construed -Contra proferentem - ambiguous provisions construed against the drafter (i.e., insurer) in favor of coverage. "Honoring the reasonable expectations of the insured"? Minority doctrine

Insurance Policy Interpretation

-Policies are a contract. -Policy is read as a whole, all terms are supposed to be given effect. -Provisions that grant coverage ("insuring agreement" are broadly construed, while exclusions or limitations are narrowly construed). KEY- If ambiguous provisions construed against the drafter (I.e., insurer), called contra proferentem. The effect is that ambiguous provisions are construed in FAVOR of coverage.

What is the purpose of subrogation?

-To prevent the insured from collecting twice for the same loss -To hold the negligent person responsible for the loss -To keep down insurance rates

In most states (by statute), the insurable interest requirement is satisfied if the policyholder has:

1. Close Family: A "substantial interest endangered by love and affection"; or 2. Economic Interest: A "lawful and substantial economic interest: in the continued existence of the insured.

Vargas rule applying contra proferentem only occurs where insurer: Vargas v. Ins. Co. of N. America.

1. Could have clarified the language AND 2. Where insured's interpretation was reasonable

Who are the three individuals involved in an insurance policy?

1. Policy owner—must have an insurable interest in the CQV. 2. Beneficiary— If a 3rd party bene, they must have an insurable interest in the CQV. 3. Insured ("CQV")—In most cases, the CQV is also the owner of the policy. a. The insurable interest requirement is automatically met when the owner and CQV are the same person.

2 Largest Sources of Disability Insurance

1. Social Security Disability Insurance (SSDI): Covers those who have paid into Social Security. a. Covers against risk due to medical conditions expecting to last at least 1 year or result in death. 2. Workers' Compensation: Covers against lost income and medical expenses caused by a work-related injury. Coverage applies irrespective of fault. a. "Partial Disabilities": Disabilities which only limit an individual's ability to engage in certain types of work, or to work full time rather than on a part time basis.

Proving Misrepresentation

1. There was a misrepresentation made and 2. The misrepresentation was material.

Assignment of Life Insurance Policies

A life insurance policy is an asset that can be sold, or "assigned", as insurance terminology puts it.

Double Indemnity

A life insurance provision that allows a claimant to recover additional money—generally a double payout—in the event of an accidental death.

Incontestability is NOT a bar to all defenses

A policy challenged outside that policy's incontestability period which contravenes public policy for lack of insurable interest is nonetheless void ab initio if it violates the public policy stance against wagering.

Contra Proferentem, Defined

A policy contract rule of interpretation that that construes an ambiguity in a policy against the insurer who drafted it.

Wagering Contract

A policy, void as against public policy, which is made when the beneficiary has no insurable interest in the CQV. This contract purports to be a legitimate one, but it does not qualify because it lacks a sufficient insurable interest.

Insurable Interest

A stake of an insurance policy holder or the beneficiary of the policy in the value of the continued existence or safety of the insured property or person such that the policy holder or the beneficiary of the policy would stand to suffer financial or other loss if the event the insurance coverage was bought to protect against occurs. o In order for an insurance policy to be valid and enforceable, the holder of the policy or the beneficiary of the policy must have an insurable interest in the subject of the insurance.

Warranties & Misrepresentations: Traditional devices used to combat moral hazard.

A warranty was deemed material to the policy—so even slightest inaccuracy resulted in a breach of warranty by the insured that was sufficient to justify a denial of coverage by the insurer. In contrast, to deny coverage for a misrepresentation the law requires the misrepresentation by a material one.

Risk Allocation

All risks are not created equally. This involves looking at potential policyholders and determining how risky they might be. Riskier policyholders will be charged more. It costs money to check risk (e.g., background checks, data platforms, etc.). You get more exact data but pay more. -Insurers try to set premiums proportionate to the risk.

Faulty Workmanship Cases Russel v. NGM Ins. Co.

An ensuing loss clause, "excludes from coverage the normal results of defective construction", and applies only to distinct, separable, and ensuing losses.

Occurrence

An incident that triggers policy coverage. It is limited and defined by the policy.

Moral Hazard

An insured person may be less careful if they let the fact that they're covered make them less careful. Tendency of the insured to exercise less care to avoid an insured loss than they would if the loss were not insured.

Text notes, contra proreferetem

Argument usually advanced supporting contra proferentem is that insurer was in control of the policy and could have drafted it more clearly Text views Vargas as applying contra proferentem only where insurer (1) could have clarified the language AND (2) where insured's interpretation was reasonable In contrast, some decisions seem to apply contra proferentem as a penalty against insurer - see Rusthoven v. Commercial Standard Ins. Co. (Minn. 1986), where it was used to construed an "ambiguous" provision UNreasonably in favor of insured

Vargas v. Ins. Co of N. America CONTRA PROFERENTEM

Argument usually advanced supporting contra proferentem is that insurer was in control of the policy and could have drafted it more clearly. Vargas rule applying contra proferentem only occurs where insurer: 1. Could have clarified the language AND 2. Where insured's interpretation was reasonable

Vargas v. Ins. Co of North America

Aviation policy that applied "only to occurrences, accidents or losses which happen . . . within the United States of America, its territories or possessions, Canada or Mexico" A policy endorsement extended coverage to "The Bahama Islands" What must an insurer show under NY law? Court: "[I]s the insurer's interpretation of the contract the ONLY reasonable and fair construction as a matter of law?" Airplane as a "mode of transportation" Policy language - in the endorsement: "If inclusion of 'The Bahama Islands' carries with it inclusion of any reasonable route to and from those islands, then the policy itself should be construed to include reasonable routes to and from any location covered by the policy's territory clause, and within the aircraft's known capacity." Insurer could have avoided the ambiguity "by defining the territorial limits with more precision" - its failure to do so is construed against it Insurer's argument - "Flights over waters beyond the territorial limits pose special dangers"

Problem of Imperfect Information

Both sides (insured & insurer) need information; market failures due to lack of perfect information. Leads to 2 potential problems: -Adverse selection -Moral hazard

Roseth v. St. Paul Property & Liability Ins. Co.

Cargo policy covering livestock mortality Policy specifically EXCLUDED coverage of "any animal able to walk from the conveyance or able to walk after unloading therefrom" Post-loss conversation between insured and agent Allegedly based on agent's advice concerning loss mitigation, insured quickly sold injured calves - their value was diminished due to injuries incurred in accident Insured's claim for loss of value DENIED - insured then sued agent and insurer What was the basis of insured's claim against the insurer, seeking coverage? Insurer should be estopped to deny coverage based on agent's failure to correct insured's misconception that the injured calves were covered Trial court: Estoppel applied to defeat denial of coverage. Agent thought there was no coverage, but let insured go on thinking there was, and insured acted based on this misconception Equitable estoppel - doctrine that precludes someone (insurer) from asserting a right it would otherwise have (to deny coverage), because of its conduct that the other party (insured) has relied upon So why did insurer lose, even though South Dakota employs the minority rule? Agent's conduct occurred after the loss, rather than before or at inception of policy. Thus, no reliance by insured in connection with procuring coverage.

Incontestability

Clauses that create a durational limit on certain defenses an insurer can raise, such as misstatement by the insured that result in a defense of fraud, misrepresentation, concealment, or breach of warranty.

What kind of contract is an insurance contract?

Contingent.

Standardized Insurance Contracts

Contracts of adhesion Industry-wide standardized adhesion contracts Factors pushing the industry toward regulation: Predictability Pooling loss data Competition, regulation More standardization of policies in property and casualty lines Insurance Services Organization (ISO)

Neill v. Nationwide Mutual Fire Ins. Co. Insured signed an application he didn't read. What effect?

Court: "[W]e find that there is a fact question as to whether Nationwide asked and correctly recorded Neill's answer about previous losses. The fact that Neill signed the certification that the information was true is merely probative evidence of his misrepresentation and not dispositive of the case."

Lines of Insurance

Different types of insurance. -Property & casualty (risks to property); -Life & health (risk to person).

McCarran-Ferguson Act Sec. 1 - Sets out policy favoring STATE regulation of insurance, and provides that Congress's silence shall not be construed as a barrier to state regulation After passage of the M-F Act, every state quickly enacted legislation to ensure that the insurance industry was "regulated by State law" per Section 2.b., to avoid application of anti-trust laws (other than the boycott prohibition) And every state has an insurance commissioner or similar official/department responsible for insurance regulation

Does not prevent Congress from regulating insurance - just makes clear that it will not do so inadvertently To regulate insurance, Congress must expressly say that's what it is doing - so, there is no "implied" federal regulation

UM Coverage, Tennessee TCA §56-7-1201.

Drivers don't have to carry UM Insurance

Group Insurance and ERISA

Employee Retirement and Income Security Act of 1974 ERISA regulates the manner in which employee benefit plans are administered, but does not mandate terms and conditions of those plans ERISA preempts a certain amount of state insurance law and regulation Employer as intermediary? See UNUM Life Ins. Co. of America v. Ward, 526 U.S. 358 (1999) (ERISA preempts state agency law on this issue).

Zacarias v. Allstate Ins. Co. Interpretation Rules

First - "[I]n enforcing an insurance policy, courts will depart from the literal text and interpret it in accordance with the insured's understanding, even when that understanding contradicts the insurer's intent, if the text appears overly technical or contains hidden pitfalls, . . . cannot be understood without employing subtle or legalistic distinctions, . . . is obscured by fine print, . . . or requires strenuous study to comprehend." (Citations omitted.) Second - "[T]he plain terms of the contract will be enforced if the 'entangled and professional interpretation of an insurance underwriter is [not] pitted against that of an average purchaser of insurance,' . . . or the provision is not so 'confusing that the average policyholder cannot make out the boundaries of coverage." (Citations omitted.)

Liability for Bad Faith Breach of Insurance Contracts, Tennessee

First-party bad faith claims are statutory - see T.C.A. § 56-7-105 (although this statute has been preempted in the employer-sponsored group health insurance field by ERISA) Third-party bad faith claims are a matter of common law - see National Service Fire Ins. Co. v. Williams, 454 S.W.2d 362 (Tenn. App. 1969)

Coverage Attaching for an Incomplete Policy Gaunt v. John Hancock Mutual Life Ins. Co.

For an applicant who has paid his first premium and successfully passed his physical examination, coverage may attach even though the application has not yet been approved by the insurer. -There was coverage here, even though the application was not approved prior to Gaunt's death. The court held that both the son and insurance agent intended the son be covered from the date Gaunt completed and passed the medical examination, not the date of issuance. -The court held the son was intentionally shot and that the double indemnity clause did not apply.

Insurable Interest Requirement

For an insurance contract to be valid and enforceable, the beneficiary must have an insurable interest in the subject of the insurance policy. In most states (by statute), the insurable interest requirement is satisfied if the policyholder has: 1. Close Family: A "substantial interest endangered by love and affection"; or 2. Economic Interest: A "lawful and substantial economic interest: in the continued existence of the insured.

Silberg v. California Life Ins. Co.

Health insurance policy with $5000 limit, $100 deductible, and exclusion for "loss caused by or resulting from (1) injury or sickness for which compensation is payable under any Workmen's Compensation . . . Law." Insured sued insurer for bad faith, seeking both compensatory and punitive damages Insuring clause (recall, read broadly) - "[S]ubject to the exceptions, limitations and provisions of this policy (defendant) promises . . . to pay for loss, except losses covered by any Workmen's Compensation . . . Law . . . covered by this policy and sustained by the insured . . . resulting from injury or sickness; . . ." Exclusionary clause (read narrowly) - "EXCLUSIONS. This policy does not cover any loss caused by or resulting from (1) injury or sickness for which compensation is payable under any Workmen's Compensation . . . Law." Policy language was ambiguous - "loss" could mean "compensable expense," which would mean that insurer would have to pay any hospital expenses that weren't actually paid by workers' compensation

Authority of Insurance Agents Neill v. Nationwide Mutual Fire Insurance Company

If an insurance agent was acting within his real or apparent authority, and there is no fraud or collusion on the part of the insured, the insurance company cannot avoid liability.

Intrinsic Loss Chute v. N. River Ins. Co.

In a transportation, marine policy, policyholder cannot recover for damages arising only from an inherent defect or tendency in an insured property, and not from an extraneous cause. Transportation/Marine insurance on a piece of jewelry. The policy covers this piece of jewelry, but the jewel cracked after coverage began and by nature of its own deficiency, not by any issue in transportation. -The policy should not be made to cover the loss here because the jewel was broken by its own defects and the policy is not intended to cover a loss of that type.

Amount of Insurable Interest: Business Relationships

In business relationships outside of creditor-debtors, the business value of individuals is somewhat subjective. Both the value of a business and an individual's value to that business can fluctuate. In certain cases, it is immediately apparent the amount insured for is excessive (See Rubenstein v. Mutual Life Ins. of NY, where a low-salaried employee earning $100 a week died, and his employer received $240,000 following his death. The Court affirmed the insurers refusal to pay on the policy).

Vacancy Exclusion Provision Langill v. Vermont Mutual Ins. Co.

Insurer is not liable for loss caused by fire/lightening while a building is vacant. · RULE: Property will be considered vacant for purposes of an insurance-policy vacancy exclusion even if a nonresident makes regular, brief visits to the property. · Policy= Fire in an unoccupied building is more likely to burn, and for longer. It's more likely to cause greater damage, and for longer, before being detected. Arson is more likely, as is theft, when a property is unoccupied. · In sum, no policy coverage when someone is not living there and a vacancy exclusion provision is in effect.

Rationale for recognizing bad faith claims

Insurer must fulfill its contractual obligations to insured in good faith, not place its own interests ahead of the insured's - cannot "gamble with the insured's money" Insurer if given a legal duty to accept reasonable settlement offers - by making it responsible for consequences of acting unreasonably, courts and legislatures give insurers an incentive to act reasonably and in good faith

Risk Reduction

Insurers engage in activities for the purpose of reducing the costs associated with the risks they assume (e.g., lobbying for traffic safety laws or devices).

Risk Pooling: Diversification of Risk

Insuring a large number of policyholders with similar but independent risks reduces risk to the insurer and enables it to better predict losses

Stone Containter v. Hartford Steam Boiler Insp. & Ins.

Is the explosion exclusion ambiguous? Why not? Exception must be read in CONTEXT Are insurers allowed to bring in extrinsic evidence in an effort to "disambiguate" an alleged ambiguity? Policy was ambiguous as to whether pulp digester was an object "of a kind" described in the exceptions to the explosion exclusion Result of ambiguity? Insured argued it was not an explosion "for exclusion purposes." Did the court agree? Court: "Stone believes that the same word should be read narrowly when it appears in an exclusion from coverage, and broadly when it appears in an exception to an exclusion, even if the context is the same."

Warranties Notes

Legislatures and courts have acted to minimize possibility that warranties will be used improperly by insurers Courts tend to construe statements as representations rather than warranties wherever possible When construing a warranty, courts construe it strictly against the insurer - and often construe a warranty as affirmative rather than promissory Statutes often require that the breach of warranty contribute to the loss, be material to risk of loss, or have been fraudulently made

"Affirmative warranty"

Looked at the time the contract was entered into

"Material"

Majority - Material if increases the risk of loss (that is, if it makes the risk assumed greater than the insurer thought it was). Material if insurer would not have assumed this risk if it had been told the truth. (In some states, includes situations where insurer would not have assumed the risk on the terms it did.) TN follows. Minority - Material if it actually contributes to the loss.

Estoppel and Coverage

Majority rule - Estoppel cannot be used to create coverage for a risk that isn't covered by the policy or that is expressly excluded; in other words, estoppel cannot be used to create coverage that doesn't exist under the policy Minority rule - Estoppel can be used to prevent insurer from denying coverage, even if that coverage might be outside the terms of the policy

Concealment and non-disclosure

Misrepresentation - usually an affirmative misstatement by insured Non-disclosure - insured's failure to disclose, without being asked, known facts that insurer would regard as material to the risk Misrepresentation can be used by insurer to deny coverage IF it is untrue or misleading, material to the risk, and relied upon by insurer in issuing policy To deny coverage due to non-disclosure, insurer typically must ALSO show scienter (fraudulent intent to not disclose a fact the applicant/insured knows is material)

Applications, Misrepresentations

Misrepresentation issue often arise in connection with applications for insurance A misrepresentation can be grounds for rescinding the policy or otherwise DENYING coverage But the misrepresentation has to be MATERIAL (though not necessarily intentional)

Duty to Sophisticated Policyholders

Most states impose limited duties to ordinary policyholders, but give agents a greater duty when dealing with sophisticated commercial insureds. Is this backwards?

Private Disability Insurance

Mostly provided through group policies as an employee benefit but can be bought on an individual basis. Small Market for Private Disability Insurance: Risk of adverse selection and moral hazard. SSDI and Workers' Comp already covers large numbers of people, at least for their basic living needs.

Sun Life Assurance Co. of Canada v. Wells Fargo Bank A life-insurance policy procured without an insurable interest is void at the outset.

Ms. Bergman took out a $5mil policy. She claimed her income was $600k a year. It was in fact $36k. The owner and sole bene was a trust in Bergman's name, but the benes were all total strangers to Bergman, and were all investors. This looks a wager. -Although the investors tried to allege the incontestability clause makes it impossible to deny coverage, the Court held that this was void as against public policy for lack of insurable interest. "If a policy never came into effect, neither did its incontestability clause; the clause thus cannot stand in the way of a claim that the policy violated public policy because it lacked an insurable interest."

It is not always easy to determine what type of conduct rises to the level of bad faith . . .

One example - Gruenberg v. Aetna, Text p. 91 (insurer encouraged arson charges to be brought against insured, then denied coverage for failure to comply with policy condition requiring cooperation, when insured didn't show at civil deposition while criminal action was pending)

"Promissory warranty"

One extending into the future

Intermediaries. What is the general rule that applies when a misrepresentation is made on an application completed by an agent?

Per court in Neill v. Nationwide, "It is a well-settled proposition that where the facts have been truthfully stated by an insured to the soliciting agent, but by fraud, negligence, or mistake, the facts are misstated in the application to the insurer, the insurer cannot rely on the misstatements in avoidance of liability, if the agent was acting within his real or apparent authority, and there is no fraud or collusion on the part of the insured."

Neill v. Nationwide Mutual Fire Ins. Co. Declaratory judgment action Statements about prior fire losses were true and material to the risk assumed. So why wasn't that sufficient to support summary judgment for the insurer?

Per court, the general rule that applies when an agent records information incorrectly is: "It is a well-settled proposition that where the facts have been truthfully stated by an insured to the soliciting agent, but by fraud, negligence, or mistake, the facts are misstated in the application to the insurer, the insurer cannot rely on the misstatements in avoidance of liability, if the agent was acting within his real or apparent authority, and there is no fraud or collusion on the part of the insured."

Insured

Person or entity covered by the insurance company's issued policy.

All-Risk Policy

Policy covering all perils except those specifically excluded. Covers against all incidents that occur of the policy type.

Public Policy Restrictions on Insurance Contract Terms Neal-Pettit v. Lahman Legal issues presented to state supreme court - (1) whether it is against public policy for an insurer to pay attorney fees awarded as a result of a punitive damages award, and (2) whether Allstate's policy provision excluding coverage of 'punitive or exemplary damages, fines or penalties' excludes coverage of attorney fees that are awarded in conjunction with a punitive damages award

Policy excludes coverage for "punitive or exemplary damages, fines, or penalties" What is Ohio's public policy regarding coverage for punitive damages? "public policy prevents insurance contracts from insuring against claims for punitive damages based upon an insured's malicious conduct" state statute prohibits auto insurance policies form covering "judgments or claims against an insured for punitive or exemplary damages" What are some arguments FOR and AGAINST permitting insurance coverage of punitive damages? Note: In Tennessee, it is not against public policy to insure against punitive damages (see, e.g., Lazenby v. Universal Underwriters Ins. Co., 383 S.W.2d 1 (Tenn. 1964))

Expected Value

Probability of a loss; a quantified estimate of the risk assumed by the buyer.

"Honoring the Reasonable Expectations of the Insured"

Professor Robert Keeton urged that courts honor "the objectively reasonable expectations of applicants and intended beneficiaries regarding the terms of insurance contracts . . . even though painstaking study of the policy provisions would have negated those expectations" Minority doctrine (has NOT been adopted in Tennessee) Goes beyond contra proferentem by allowing the court to rule for the insured even when that is not consistent with the policy's language Example: Atwater Creamery (p. 59) Burglary policy required "evidence of forcible entry" for coverage What is the purpose of such a requirement? Court found coverage despite no evidence of forcible entry: "We hold that where the technical definition of burglary in a burglary insurance policy is, in effect, an exclusion from coverage, it will not be interpreted so as to defeat the reasonable expectations of the purchaser of the policy."

REGULATION of Insurance

Rating bureau and its member insurance companies were indicted for alleged violations of federal antitrust laws (fixing premium rates, boycotting non-members) Boycott = concerted refusal to deal with non-members Held, insurance is interstate commerce! Practical effect of holding was twofold: (1) Congress had the power to regulate the insurance industry; and (2) Congress had already done so through Sherman Antitrust Act and other statutes To remedy the problem created by South-Eastern Underwriters, Congress passed the McCarran-Ferguson Act in 1945 M-F Act determines who (state or federal) may regulate the insurance industry, and under what circumstances

What is the "first virtue" of any insurer?

SOLVENCY Accurate and comparable data is needed to set proper rates

McCarran-Ferguson Act Sec. 2

Sec. 2.a. - The "business of insurance" and those who engaged in it shall be regulated and taxed by the STATES Sec. 2.b. - Contains 2 key points: 1 - Congressional legislation does NOT preempt state regulation or taxation of insurance UNLESS the federal legislation "specifically relates to the business of insurance" 2 - BUT, federal antitrust regulations (i.e., Sherman Act, Clayton Act, FTC Act) DO apply to "business of insurance" to the extent that "such business is not regulated by state law"

McCarran-Ferguson Act Sec. 3

Sec. 3.a. (not in Text) - Suspended application of federal antitrust laws until June 30, 1948 (to give time for states to impose regulations, if they hadn't already done so) Sec. 3.b. - Provided that specific named provisions of Sherman Antitrust Act DO apply, regardless of what states do or don't do (i.e., "agreement to boycott, coerce, or intimidate, or act of boycott, coercion, or intimidation") * What Section 3.b. does not say is important - the Sherman Act's prohibition of price-fixing does NOT apply to the business of insurance and insurers as long as relevant state regulation is in place

How material must a misrepresentation be under the majority test (material to the risk assumed)?

See Mutual Benefit Life Ins. Co. v. JMR Electronics Corp., 848 F.2d 30 (2d Cir. 1988) [Text p. 27] Restatement of Liability Insurance Law §8 defines "materiality" this way - "A misrepresentation by an insured during the application for, or renewal of, an insurance policy is material only if, but for the misrepresentation, a reasonable insurer in this insurer's position would not have issued the policy or would have issued the policy only under substantially different terms."

Risk Transfer

Shifting risk from a risk averse party (the insured) to a party that is less risk averse (the insurer). Through insurance, an insured can turn a small risk of a large loss into a 100% certainty of a small loss (I.e., the premium).

Group Insurance

Takes everybody, regardless of age, condition, etc. Charges everyone the same. E.g., Belmont insurance.

Binder

Temporary insurance coverage you get before your standard policy kicks in. This gives you temporary coverage. A write memo of the important terms giving you temporary protection to insured pending investigation of risk by insurance company or until a formal policy is issued.

Insurer

The Insurance Company, the entity that provides insurance policy coverage. Distribution of the risk of economic loss among a substantial number of members through an insurer engaged primarily in this as its business.

Causa Proxima

The cause of the loss must be direct and insured in order to claim for compensation.

Function of Insurance

The function of Insurance is to protect a policyholder in the event of a future economic loss.

Owner and CQV are NOT the same person

The insurable interest requirement is automatically met when the owner and CQV are the same person. Thus, this requirement is only implicated when the owner of the policy involves insuring the life of someone else. In those instances, the owner and any third-party named as beneficiaries must have an insurable interest in the life of the CQV. Some states even require the CQV consent to any policy take out on her life.

Designating Beneficiaries

The owner of a life insurance policy may name or change a bene without their approval.

Grigsby v. Russell - Assigning Life Insurance Policies

The owner of an insurance policy, who is also the CQV, may assign the policy to an individual having no insurable interest in the holder's life for consideration. This gives the individual assignee, rather than the personal representatives of the holder's estate, the right to collect the proceeds of the policy.

Adverse Selection

The poorest risks are the most likely to seek insurance to offload the risk. You want to transfer the risk but you don't want to tell the insurance company if you're a huge risk, or they won't want to provide you coverage. -Insurers can protect against it by gathering as much information as reasonably possible and classifying risks accordingly.

Silberg v. California Life Ins. Co. - Compensatory damages

Trial court erred in finding insufficient evidence to support bad faith claim - "[T]he evidence shows as a matter of law that defendant breached the covenant of good faith and fair dealing implied in every insurance contract by its failure to make payments under the policy and that, therefore, it was liable for the physical and mental distress proximately caused by its conduct." (Emphasis added.) Insurer has a duty "to accept a reasonable settlement so as to absolve its insured of liability to a third person" - this is "implied in the covenant of good faith and fair dealing which exists in every insurance contract" What could insurer have done if it wanted to fulfill its contractual obligation but also protect itself from possible over-payment? This duty cannot be altered by alleged industry custom or practice

Liability for BAD FAITH Breach of Insurance Contract

Under ordinarily contract law, what would be the measure of damages if an insurer breached the insurance contract? Every contract has an implied covenant of good faith and fair dealing, and most states recognize common law or statutory actions for an insurer that acts in "BAD FAITH" breach of this duty Contract damages - economic damages are recoverable but they must be within the contemplation of the parties (NO consequential damages) - so it can be difficult or impossible to recover NON-economic damages Tort damages - damages are not limited to those within contemplation of parties, IF they are proximately caused by insurer's conduct - and punitive damages may be available

Cessation of an Insurable Interest

Unless otherwise stated in its provisions, a valid policy is not void by cessation of an insurable interest. Grisby v. Russell.

Langwith v. Am. Nat'l General Ins. Co. -DUTY OF INSURANCE AGENT

Unless there's evidence of an expanded agency agreement, the agent is not bound to a duty above and beyond that in his capacity as an agent of his insurance company employer.

Role and Authority of Intermediaries

Use of intermediaries to procure coverage vs. direct writers Insured's concern: Can agent bind coverage? Actual authority vs. Apparent authority Apparent authority arises when PRINCIPAL says or does something to lead a third party to reasonably believe that the agent has actual authority See, e.g., Elmer Tallent Agency v. Bailey Wood Products

Social Functions of Insurance

Vehicle to accomplish social goals as well as a pure economic function between parties.

Silberg v. California Life Ins. Co. - Punitive damages

What does the court say is the standard for awarding punitive damages? Insurer "must be guilty of oppression, fraud or malice" - must act with intent to "vex, injure or annoy, or with a conscious disregard" of insured's rights Insurer must have a "requisite intent to injure" the insured Bad faith conduct alone does not prove that insurer acted with requisite intent to justify punitive damages Supreme Court affirmed trial court's decision that there was insufficient evidence to support award of punitive damages

Zacarias v. Allstate Ins. Co.

What is an intra-family exclusion? What is its purpose? "Defending under a reservation of rights"? Would you consider the exclusion conspicuous or obvious to a reasonable insured? 18 page policy Page 3, "Definitions" section defined "insured person": "means you and, if a resident of your household: a) any relative; and b) any dependent person in your care." Pages 12-13, under "Losses We Do Not Cover," is the exclusion at issue: "We do not cover bodily injury to an insured person or property damage to property owned by an insured person." "Declarations" page outlined coverages and policy limits, did not mention intra-family exclusion New Jersey follows the "plain meaning" rule, but . . . "When there is ambiguity in an insurance contract, courts interpret the contract to comport with the reasonable expectations of the insured, even if a close reading of the written text reveals a contrary meaning."

Amount of Insurable Interest

When a policy insures the life of someone other than its owner, recovery is limited to the amount of the purchaser's and beneficiary's insurable interest in the insured. Debtor-Creditor: The amount of the debt that is owned, potentially with interest and costs added.

Does this life insurance policy have a legitimate insurable interest? The question when analyzing whether a life insurance is valid in this scenario is...

Whether there was an insurable interest (either "love" or economic interest) at the time the policy was taken out.

What is "material" under the majority and minority rules?

a. Majority: If it increases the risk of loss (makes the risk assumed greater than the insurer thought it was). Material if insurer would not have assumed this risk if it had been told the truth. i. In some states, it includes situations where insurer would not have assumed the risk on the terms that it did. TN does this. b. Minority: Material if it actually contributed to the loss. b. Intent to Deceive Not Required. But it can be a separate reason to deny coverage because it is a type of fraud. a. It's a Crime. Intent to Deceive and Material Loss is Fraud and a crime in most places.

Insurance cannot prevent the occurrence of risk, but it does provide for the

losses of risk.

An actuary is expected to

make a reasonable forecast about the future liabilities of policies.

Ratemaking is

the pricing of insurance and the calculation of insurance premiums for each class of insurance.

Engelman v. Connecticut General Life Ins. Co. - Substantial Affirmative Action Doctrine for Changing Life Insurance Beneficiaries

· Although the general rule is that changing the beneficiary of an insurance policy can be effectuated by following the procedures in a policy, the "Substantial Affirmative Action" Doctrine is an exception which effectuates an owner's intention to change the beneficiaries of her policy if: o The owner clearly intended to change the beneficiary and to designate the new beneficiary; and o The owner has taken substantial affirmative action to effectuate the change in the beneficiary.