Chapter 4- Applying Contract Law

three characteristics of a binding insurance contract

1) agreement including issued concerning offer and acceptance, effective date, and silence or delay 2) policy content, written or oral that includes certain terms and identifies the insurer 3) delivery or placement of the policy in the insured's control

an insurance contract can benefit a third party in two primary ways:

1) insurance contracts can protect third parties in cases of injury or damage 2) insurance contracts can protect third parties in real estate sales and mortgages as well as limited in realty, such as lease interests and life estates

conditional contract

A contract that one or more parties must perform only under certain conditions.

misrepresentation

A false statement or lie that can render the contract void.

direct-action statute

A law that permits a negligence victim to sue an insurer directly or to sue both the insurer and wrongdoer jointly

binder

A temporary written or oral agreement to provide insurance coverage until a formal written policy is issued.

principle of indemnity

The principle that insurance policies should provide a benefit no greater than the loss suffered by an insured.

Election (definition)

The voluntary act of choosing between two alternative rights or privileges.

incontestable clause

a clause that states that the insurer can't contest the policy after it has been in force for a specified period, such as two years, during the insured's lifetime

Contract of indemnity definition

a contract in which the insurer agrees, in the event of a covered loss, to a pay an amount directly related to the amount of the loss

Elements of a Contract

a contract must have each of these elements to be legally enforceable: - agreement -capacity to contract -consideration -legal purpose

valued policy

a policy in which the insurer pays a stated amount in the event of a specified loss (usually a total loss) regardless of the actual value of the loss.

insurance company designation

a producer representing two or more insurers can agree to provide coverage to an applicant without designating the insurer's identity at the outset. However, this could lead to a situation in which a loss occurs before an insurer issues a policy. If a producer has placed previous business or oral renewals for an insured with a particular insurer, that producer's acceptance of another oral agreement usually binds the same insurer. But when the parties have had no previous dealings, or when the producer has changed insurers several times for renewals, the matter becomes more complex if the producer has made a note, a memorandum, or an outward indication of intent indicating that an insurer will write the coverage, the note is sufficient to bind that insurer. For instance, a calendar notation meant to serve as a reminder to place the policy with Insurer A might be a sufficient record. The producer's mere mental resolve, however, to place business with "insurer A tomorrow" is not sufficient to create an insurance contract

reservation of rights letter definition

an insurer's letter that specifies coverages issues and informs that insured that the insurer is handling a claim with the understanding that the insurer may later deny coverage should the facts warrant it.

waiver definition

the intentional relinquishment of a known right

reservation of rights letters

a reservation of rights letter serves the same purpose as a nonwaiver agreement but is in letter form, and it is a unilateral document, meaning that it does not require the insured to sign or agree to the contents of the letter. It simply advises the insured of the potential coverage issue. nevertheless, a reservation of rights letter can be as effective in protecting the insurer's rights to policy defenses as a nonwaiver agreement if the insurer has drafted the letter carefully and can show that the insured received it.

utmost good faith

an obligation to act in complete honesty and to disclose all relevant facts

Contract of Adhesion definition

any contract in which one party is put in a "take-it-or-leave-it" (take it or leave it) position and must either accept the contract as written by the other party or reject the contract entirely

construction of representations

determining whether a misrepresentation is sufficient to justify avoidance of an insurance policy can be a complicated process. Courts often interpret representations in favor of insureds- even if a representation is not literally true, is it not a misrepresentation as long as it is substantially more true than false whether an inaccurate representation is substantially true depends on its materially to the contract. The test of materiality, in turn, is whether the contract would have been formed had the applicant told the truth. To revisit past examples, getting the color of a house wrong on a homeowners application is not likely to be considered material, but getting the type of construction wrong- whether wood frame or brick-probably would be

necessary terms and implied terms in insurance contracts , part 3

if the two parties do not have a history of working together, courts may look to outside sources for information that might provide implied terms for the insurance contract. For example, an insurer's implied terms can also be determined by reviewing the policy language and conditions set forth in the other similar policies it has issued. If the subject in question is the premium, a court will probably conclude that the contract implies the rate the insurer has filed with insurance regulatory authorities or the rate the insurer usually charges others for the same type of risk finally, courts may consider the insured's coverage needs and practices by comparing them with those of others engaged in similar endeavors. However, while these needs and practices can bear on the implied terms, an insured's unique situation might not necessarily result in implied insurance provisions.

sequence of events leading to estoppel

in insurance law, estoppel is created by this sequence of events: 1) false representation of a material fact 2) reasonable reliance on the representation 3) resulting injury or detriment to the insured

janice signed an agreement to purchase a vacation home, but the closing won't take place for another six weeks. When should she purchase insurance on the property she is buying?

janice will have na equitable interest in the vacation home as soon as both parties sign the agreement of sale. Even though the seller has legal title, she will own the home, subject to the payment of the purchase price, under the doctrine of equitable conversion. One result of this equitable ownership is that Janice will bear the risk of loss ( in most states) and would therefore require an insurance policy when the agreement is signed to protect her interest in the property

the buyer may face loss exposure in three situations:

1) only the seller has property insurance- this arrangement is most common in residential sales. If fire damages or destroys the property, the sale still goes through. Which party receives the insurance proceeds depends on the sales contract terms. 2) the seller and buyer each have property insurance to protect their respective interests- This arrangement is typical in commercial transactions and in some residential sales. It is good for the buyer, who then controls the type and amount of coverage and the selection of insurer. Both seller and buyer can recover to the extent of their respective losses. 3) the seller and buyer purchase a policy together- this arrangement is the most sophisticated but least common. If the seller and buyer together have purchased homeowners insurance covering their respective interests in the property, insurance proceeds go to make each party whole. For example, the seller collects policy proceeds to the extent of the unpaid purchase price, and the buyer collects proceeds to the extent of the deposit some states have adopted the Uniform Vendor and Purchaser Risk Act, under which losses that occur during the contract period are allocated to the seller unless the buyer has taken possession before closing. The risk of loss is on the person in possession because that person is in the best position to take care of the property

contract of indemnity, part 2

A contract of indemnity does not necssarily fully indemnify insureds. However, th amount the insurer pays is directly realted to the amount of the insured's loss. Most policies cotain a policy limit that specifies the maximum amount the insurer will pay for a single claim. Many policies also contain limitations and other provisions that could reduce the amount of recovery For example, a homeowners policy is not designed to cover large amounts of cash. most homeowners policies therefore contain a specific limit such as $200 for any covered loss to money owed by the insured. If a covered fire destorys $1,000 in cash belonging to the insured, the homeowners insurer will pay only $200 for the money that was destroyed insurnace policy usually include certain provisions that reinforce the principle of indemnity policies generally contain another insurance provision to prevent an insured from receiving full payment from two different insurance policiesfor the same claim. Insurnace contracts usually protects the insurer's subrogation rights. Other insurance provisions and subrogation provisions clarify that the insured can't collect more than the amount of loss. For example, following an auto accident in which the insurer compensates its insured when the other driver is at fault,the subrogation provision stipulates that the insured's right to recover damages from the responsible party is transferred ( subrogated) to the insurer. The insured can't collect from both the insurer and the responsible party .

agreement

As is pertains to an insurance contract, the two main components of agreement are that an offer is made by one party and subsequently accepted by another. However, other factors must also be considered- namely, the effective date and effect of silence or delay on the existence orvalidity of an apparent agreement.

Contract of adhesion

any contract in whih one party is put in a " take-it or leave- it" position and must either accept the contract as written by the other party or reject the contract entirely

mortgagor's and mortgagee's interests

both the mortgagor and mortgagee have separate and distinct insurable interests in mortgaged property. The mortgagor is the property buyer who provides a mortgage ( claim against the property) and the mortgagee is the lender who receives the mortgage in return for providing the funds to purchase the property It is customary for the parties to agree in the mortgage on who will obtain insurance on the property. If such a provision is not included on the mortgage, one of three situations can occur: - the mortgagor can obtain separate insurance on the property, solely for the mortgagor's benefit - the mortgagee can obtain separate insurance on the property. If so, money the insurer pays in the event of loss does not accrue to the mortgagor's benefit and therefore is not payable to the mortgagor. - the mortgagor can obtain insurance for the mortgagee's benefit by either assigning the policy to the mortgagee or including on the policy a standard mortgage clause making any proceeds under the policy payable to the mortgagee " as the mortgagee's interest may appear"

example

concerned that he's left himself vulnerable to a sizeable loss, Hecotr emails his insurance agent asking to increase the combined single liability limit on his auto policy from $100K to $500K the agent immediately replies by email "absolutely" . Hecotr then asks when the increased limits will take effect. What do you think? agent's promise is binding, so the agent should indicate that Hector's increased limits become effective at the time the return email is sent

Lease Interests

courts are divided with respect to the lessor's and the lessee's right to recover under property insurance policies. The lessor is the owner of the leased property, and the lessee is the tenant or renter. until relatively recently, lessor's fire insurers did not make subrogation claims against lessees for the lessee's liability in causing fire damage to insured property. Protection can now take several forms: - the insurer waives its subrogation rights against the lessee by endorsement to the lessor's fire policy. -a lease provision that makes the lessor financially responsible to pay for damage to the property - the lessee is included as an additional insured on the lessor's policy. - the lessee purchases an insurance policy protecting against liability for damaging the lesssor's property -the lessee purchases a separate fire policy covering the leased premises

estoppel

estoppel is a legal principle that prohibits a party from asserting a claim or right that is inconsistent with that party's past statement or conduct on which another party has detrimentally relied. for example, Kim offers Carlos a job at her company.T eh new job requires Carlos to relocate across the country, so he sells his house and finds an apartment close to where he will be working. On the day he is supposed to start the new job, Kim tells Carlos she can't hire him. Carlos, in a lawsuit, might assert that Kim is estopped from acting in contradiction to her original statement

example of misrepresentation

for exampe, assume that an applicant for auto insurance has beed issued two speeding tickets during the 18 months immediately before he submitted his application for insurance. when asked whether any driving violations have occurred within the past three years ( a question found on most auto insurance application forms) an applicant giving either of these answers would be making a misrepresentation " I remember have one speeding ticket about two years ago" " I've never been cited for a moving violation- only a few parking tickets." the first respose provides incorrect infromation, either intentionally or unintentionally. The false statement made in the second response is probably intentional. The direct question posed in the application requires a full and honest response from the applicatn because the insurer relied on the information. Anything less is a misrepresentation, intentional or not.

Misrepresentation

in normal usage, a misrepresentation is a false statement. In insurance, a misrepresentation is a false statemtn of a material fact on which the insurer relies. the insurer does not have to prove that the misrepresentation is intentional as with concealment, if a material fact is misrepresented, the insurer could choose to avoid the policy because of the violation of utmost good faith. The laws regarding concealment and misrepresentation can vary by jurisdiction. An insurance practitioner should consult with competent legal counsel before attempting to avoid an insurance contract.

Insurance contract formation

insurance policies are based on contract law and are often subject to specific requirements related to inception and execution. Familiarity with these requirements can protect an insurance professional from mistakes or misrepresentations that could lead to bad-faith lawsuits. Insurance sales are frequently handled by insurance producers who represent insurers as agents and insureds as brokers. under the law of agency, an insurance producer acting as an agent can create contract liability for insurers- even though the insurer may not have intended to be bound.

nonwaiver agreements and reservation of rights letters

insurers use nonwaiver agreements reservation of rights letters to preserve certain defenses against potential liability under policy terms. Claims personnel frequently use these tools during a loss investigation when they believe that the insurer might deny coverage under the policy the possibility of denying coverage poses a delimma for the insurer. If the insurer continues to investigate a loss on its merits without determining whether it can legitimately deny coverage, its rights might be prejudiced. Such actions can raise issues of waiver, estoppel or election that could negate the insurer's lack-of-coverage defense. However, if the insurer does not investigate, it might forfeit all defenses and the loss can increase. both a nonwaiver agreement and a reservation of rights letter can prevent subsequent claims of waiver of waiver, estoppel, and any other theories of rights that vary with policy provisions

representations and warranties in insurance, part 2

the different legal requirements and consequences of representations and warranties highlight why it's necessary to distinguish them clearly: - representations are collateral, or indirect, inducements to the contract. Warranties are part of the final insurance contract. - to constitute a valid defense, representations must be proved to be material. the law presumes warranties to be material, and their breach makes the contract voidable - representations can be oral, written in the policy, or written on another paper and need not be incorporated by reference expressly. Insurers either write warranties in the policy or incorporate them by reference - representations require substantial truth, but warranties require strict compliance

nonwaiver agreement, part 2

the insurer should attempt to enter into a nonwaiver agreement with the insured as soon as the potential coverage question surfaces. Occasionally, practical difficulties arise in the attempt to secure the insured's consent and signature: 1) the insured might refuse to sign a nonwaiver agreement, even after the claim representative has clearly explained its significance. This refusal can delay the investigation of the loss. 2) the insure could challenge the nonwaiver agreement if the claims representative has not explained the importance of the agreement fully and fairly. The lack of adequate explanation can lead an insured to claim lack of contractual intent, misunderstanding, duress of other defenses that can jeopardize the agreement's validity

relative disadvantages for insured

waiver- requires proof of the insurer's voluntary relinquishment of known right estoppel- requires proof of detrimental reliance election- difficult to prove

Classification of Warranties

warranties may be either affirmtive, continuing (or promissory) or implied

mortgage, mortgagor and mortgagee

what is a mortgage? many people commonly use mortgage as a synonym for loan. A mortgage represents a financial claim against property such as real estate. The mortgagor/borrower signs a document providing a lien or title (claim) to the lender ( mortgagee). Many people commonly ( but inaccurately) say that the borrower "gets" the mortgage but the borrower is the mortgagor who is the pledger of the interest. The mortgagee "gets" the mortgage.

examples of acts that can constitute a waiver

several acts can show that an insurer intends to continue a contract in force, therefore creating a waiver. Examples include, but are not limited to , these: - receipt of a premium with knowledge of a breach of policy conditions - demand for appointment of appraisers or submission of a dispute to arbitration according to policy provisions- or any other demand the insurer is entitled to only if the policy is in force - request for proof of loss after knowledge of a breach in a contract without a nonwaiver agreement - silence beyond a reasonable time from learning of a breach. for example, if a proof of loss is defective, the insurer's silence concerning the defet beyond a reasonable time constitutes a waiver .

Let's examine some other key concepts related to waiver:

1) consideration- in general contract law, waivers that are made without receipt of consideration are not binding. in insurance law, consideration isn't always necessary. an insurer that paid for a loss without receiving proof of loss, for example, has waived its right to proof of loss even though it hasn't received any consideration from the insured in exchange 2) knowledge requirement- to avoid creating an implied waiver for a policy condition, an insurer must act as soon as it learns there has been a breach of that condition. For example, a producer knows that an insured is constructing an addition to an insured building that has a sprinkler system to control the spread of fire. the producer, however, does not know that the building contractor will shut off the sprinkler system temporarily during construction. The producer's failure to inform the insured that coverage could be affected is not a waiver of the automatic sprinkler clause. But if the producer learns that the sprinkler system is turned off and fails to act, the producer would create an implied waiver for the clause 3) policy provisions- policy provisions that require all waivers to be writing generally are not enforced by courts. This may seem contradictory because waivers are based on the contract principle- that courts will enforce valid contractual provisions. But it makes sense after considering that allowing insurers to remove the defense of waiver simply by inserting a policy provision defeats the purpose of waivers. Even when a nonwaiver clause is enforceable, it may contain loopholes. For example, if producers use their authority to make written and oral changes in policies to make oral changes that result in waivers, their authority could supersede and negate the waiver provision.

Let's examine some other key concepts related to waiver, part 2

4) acts constituting waiver- an insurer's intention to give up the right to assert a known defense, through either words or action, can constitute a waiver. However, to provide a waiver for breaching a policy condition, the insurer must first know the circumstances. To revisit the first sprinkler example, the insurer needed to know the contractor was going to disconnect the water sprinkler system before it could waive the condition requiring the system to the enabled. With knowledge of a breach in policy conditions, the insurer can declare the policy void. If it does not do so, an implied waiver occurs 5) parol evidence rule- waivers are subject to the parol evidence rule, which prohibits introduction into evidence at trial any oral agreements made before or at the same time as formation of a written contract. as far as the law is concerned, the final written insurance policy contains all waiver agreements that have arisen from words or acts exchanged between parties before or during writing of the policy. AS a result, an agent's oral promise to waive future breaches before or during the finalizing of a policy is ineffective as a waiver and not admissible as evidence However, if the waiver supported by evidence was made after the policy was written and authorized, parol evidence may be admissible to determine whether a waiver exists

Limited Interests in Realty

legal issues often arise with respect to limited interests in real property. Limited interests are any interests in real property short of legal ownership, such as lease interests or life estates.

representations

representations precede or accompany an insurance contract and do not relate to the contract itself. For example, when looking for auto insurance coverage, a prospective insured might reveal a previous traffic citation or auto accident. While this information is related to the insurance coverage, it isn't a subject matter of the contract; the applicant's vehicle and coverage choices are elements of the contract. however, intentionally false representation or misrepresentation can make an insurance contract voidable

defined

waiver- insurer's voluntary and intentional relinquishment or abandonment of a known right estoppel- insurer's prohibition from enforcing certain conditions of a policy when insurer's representation, express or implied in words or conduct, caused insured to rely on the representation election- insurer's voluntary choice of an inconsistent alternative, which precludes subsequent selection of the other alternative

offer and acceptance, part 2

Sometimes, an insurnace applicant merely invites the insurer to make an offer.For example, an applicant who calls an insurer's customer service center to ask how much a policy would cost is not making an offer. In that case,the contractual offer would consist of the insurer issuing a policy and acceptance would come in the form of the insured paying the associated premium. Similarly, if the policy as issued does not comply with the coverage or rates the applicant requested, the policy would be considered a new offer that the applicant would need to accept or reject Occasionally, an insurer will provide a potential applicant with a nonbinding statement called an indication, which is a rough idea of what premium might be, based on limited information. This enables the parties to decide whether trying to do business together is worthwhile. Additionally, parties must be aware of how certain terms- suc as "quote" or "quotation" - are used. for some, a quote is an offer and for others it's merely an indication As with contracts in general, communicating the offer to the offeree is essential to an insurance agreement. Only the person to whom an offer is addressed or that peron's agent, can accept or that person's agent can accept an offer. For example, if a proposed insured has died before taking action to accept a policy, the widowed spouse can't accept the offer. Additionally, mailing an acceptance binds an insurance contract at the time of mailing, whether or not the other party receives it. Thus, if the insurer's issuance of a policy is the offer, the insured's mailing the premium is response to that offer is the binding acceptance

apply knowledge

a business owner applies for a fire insurance policy for a building that is located on leased land, a fact the insured discloses on the application. The producer delivers the policy to the insured, saying " Here is the policy and it fully covers your building". However, the policy expressly provides that it is void if the insured building is located on leased land. the insured accepts the policy without reading it and puts it with other valuable papers. When the building is later damaged by a fire, the insurer denies the claim. Are the elements leading to estoppel present in the case? Feedback: all the elements leading to estoppel are present in this case. the insurer, through its producer, made a false representation by stating that the policy covered the building. The insured reasonably relied on the representation by accepting the policy and not purchasing other insurance. The insured's failure to read the policy does not mean reliance is unreasonable For the insurer to deny coverage based on the policy would harm the insured who would have no insurance coverage. The insurer is prevented or estoppel from denying that coverage exists.

Insurance policy content

a commercial insurance contract often involves detailed negotiations. Frequently, concerns arise as to which papers and conversations form the ultimate insurance contract. Once an insurer writes the policy, courts will usually act under the assumption that it contains all prior written or oral negotiation or agreements. Every contractual term in the policy at the time of delivery, as well as those written in afterward as policy riders or endorsements with both parties' consent, is part of the written policy. Although oral insurance contracts are valid, written policies are preferable. Oral agreements can give rise to lawsuits, usually involving the insurer's word against the insured's , forcing a court to rule. Nonetheless, oral contracts to property-casualty insurance are common, particularly when the applicant completes the application process and binder by telephone the final version of an insurance contract is always the policy form itself. But the insured and insurer need to understand the contract language in force from the time the binder or conditional receipt takes effect until the insured receives a policy

life estates

a life estate is an interest in real property for the duration of a person's life. The person with that interest is a life tenant and the person who has a interest in the property after the life tenant's death has a remainder interest the general rule is that if a building has been insured before the creation of a life tenancy and is destroyed afterward, the interests in the property convert to interests in personal property, and the life tenant has a life estate in the insurance contract proceeds. In other words, the life tenant's interest is no longer in the building or land, but only in its monetary worth. This arrangement is not satisfactory from the life tenant's or the remainder person's standpoint; it would be better is specific arrangements were made in advance for insurance coverage to apply toward repairs assume that a life tenant holds a policy in his own name and does not designate the remainder person as an additional insured. If the property is destroyed, the life tenant can recover the entire value of the property, even if it exceeds the cash value of the life estate. Insurers often choose to overlook this deviation from the principle of indemnity. Otherwise, they would be asserting a position inconsistent with having collected the premium that one responds to the full value of the property. Furthermore, the amount saved by resisting the life tenant's claim might not be worth the defense cost in expense and loss of goodwill. In addition, the life tenant could be the named insured on the policy, possessing a representative insurable interest on behalf of the remainder person. In this case, if a loss occurs, some of the proceeds would go to the remainder person. Generally, in the absence of specific provisions to the contrary, the life tenant is not required to repair accidental damage to the property that does not result from his or her actions nor to insure the premises for the remainder person's benefit.

nonwaiver agreements

a nonwaiver agreement, which must be signed by both parties, protects the insurer from estoppel by reserving the right to deny coverage based on information developed during the investigation. It also alerts the insured to a potential coverage problem. The nonwaiver agreement is usually used when the claims representative is concerned about investigating a claim before the insured has substantially complied with the policy conditions or when there appears to be a specific coverage problem or defense such concerns can be identified from the initial claim report, during initial contact with the insured or at any point during the claim investigation. For example, a claim representative may offer a nonwaiver agreement when the insured reports the theft of an auto but refuses to file a police report. If the insured refuses to sign the nonwaiver agreement, the claims representative can use a reservation of rights letter to protect the insurer's rights

nonwaiver agreement definition

a signed agreement indicating that during the course of investigation, neither the insurer nor the insured waives rights under the policy

warranties

a warranty is a written or an oral statement in a contract indicating the certain facts are true.As with representations, warranties can affect a contract's creation and voidablility. For a promise to be a warranty, it must meet two requirements: 1) parties must have clearly and unmistakably intended it to be a warranty 2) the statement must form a part of the contract itself. if a statement does not meet these requirements, then it is simply a representation. To minimize the risk that an intended warranty might be seen only as a representation, an insurer might require an applicant to agree to a policy provision that says all statements of fact or promises in the application are warranties. With such a provision in place, the insurer could avoid the policy if any of the facts the applicant stated were wrong in any respect. An example of this warrranty of seaworthiness- the shipowner agrees to provide a seaworthy ship for the voyage or shipment being insured- in which the application becomes part of the policy and the statements made in the application are warranties

lessening warranty effects

althought insurers prefer that courts interpret the insured's statements as warranties, courts interpret statements as factual representations whenever possible. They also prefer in interpret warranties as affirmative rather than as continuing. when possible, courts also interpret policies as severable. If one policy provision is invalid, it does not invalidate the entire policy. instead, the invalid provision can be severed or separated from other provisions. therefore, non-compliance with a warranty concerning one type of covered property doesn't defeat coverage for another type of property to which the violated warranty doesn't apply when determing whether a policy statement is a warranty or a representation, a court does not consider the use of the word " warranty" or "representation" as conclusive. Instead, it interprets the policy as a whole, including the hazards insured, the language used, and the parties' situations. For instance, a declaration that factual statements are warranties might have no effect if no other provisions or circumstances indicate that this characterization was the intention of both parties. A statement is a representation rather than a warranty unless the language unequivocally states that it is a warranty- when any doubt exists, the statement is not considered a warranty states can also play a role in reducing the effects of warranties. Some state statutes prevent insurers from specifying that representations have the same effect as warranties. Other statutes relate to strict compliance aspect of warranties and specify that only substantial compliance is necesary. Still other statutes relate to the strict compliance aspect of warranties and specify that only substantial compliance is necessary. Still other statutes relate to the time at which the breach of warranty existed and prevent avoidance of the policy unless the warranty existed at the time of the loss.

three forms of warranties

an affirmative warranty states that specific facts exist at the time the contract is formed. A continuing or promissory, warranty states that teh parties will do certain things or that certain conditions will continue to exist throughout the policy item because affirmative warranties relate only to conditions that existed when forming the contract and are less strict than continuing warranties, courts fprefer to interpret warranties as affirmative whenever they can. This approach is consistent with the general rule that if an insurance policy has two interpretations, a court will apply the interpretation favorable to the insured. If an insurer wants a continuing warranty, the policy language must state clearly that the warranty is appl to future and continued use for example, let's say a commercial property insurance application asks " who sleeps in the store?" the applicant writes, "a guard on premises at night" this statement is an affirmative warranty of conditions at the time of contract formation. If a guard slept on the premises at the time of application, but not later, the insured has not breached the affirmative warranty. If the insurer wants a guard on the premises at night during the policy term, the policy language must clearly say so. Language referring to the future ( continuing) such as "a guard will be on the premises at night" is necessary although rarely used in insurance contracts, implied warranties are obligations that courts impose on a seller to warrant certain facts about a product, even though those facts are not expressl stated by the seller. Implied warranties are conisdered to exist so that transations are reasonable and fair, particularly when the sales of goods is involved. for example, safety is generally an implied warranty for all products- when someone buys a hair dryer at a store, there is an implied warranty that it won't burst into flames when plugged in at home

Conditional contract

an insurance policy is a conditional contract. Whether the insurer pays a claim depends on whether a covered loss has occurred. Additionally,the insured must fulfill certain duties before a claim is paid, such as giving prompt notice to the insurer after a loss has occurred. a covered loss might not occur during a particular policy period, but that fact does not mean that the insurance policy for that periiod has been worthless. In buying an insurance policy, the insured acquires a valuable promise- the insurer's promise to make payments if a covered loss occurs. The promise exists, even if the insurer's performance is not required during the policy period.

relative advantages for insured

waiver- requires no proof of insured-s reliance and resulting detriment estoppel- requires no proof of the insurer's voluntary relinquishment of a known right election- requires no proof of either voluntary relinquishment of a known right or detrimental reliance

practice exercise 1

an insurer issues a fire insurance policy covering a building on leased land, a fact the insured disclosed on the application. The producer delivers the policy to the insured saying" Here is the policy, and it fully covers your building" The policy expressly provides that it is void if the building insured is located on leased land. The insured accepts the policy without reading it and puts it with other valuable papers. When the building later burns, the insurer denies the claim. Are elements leading to estoppel present in this case? answer- all the elements leading to estoppel are present in this case. The insurer, through its producer, made a false representation by stating that the policy accepting the policy and not purchasing other insurance. The insured's failure to read the policy does not mean reliance in unreasonable. For the insurer to defend its actions based on the policy would harm the insured, who would have no insurance coverage. The insurer is prevented or estopped, from denying that coverage exists. The producer's statement was not a waiver, because the insurer did not intend to give up any right under the policy

contract of indemnity, part 3

another factor enforcing the priniple of indemnity is that a person usually can't buy insurance unless that person is in a position to suffer a financial loss. In other words, the insured must have an insurable interest in the subject of the insurance. for example, property insurance contracts cover losses only to the extent of the insured's insurable interest in the proprety. this restriction prevents an insured from collecting more from the insurance than the amount of the loss he or she suffered some insurance contracts are valued policies, not contracts of indemnity. for example, a fine arts policy might specify that is will pay $250,00 for the loss of a particular painting or sculpture. the actual market value of the painting or sculpture may be more or less than $250,000 but the policy will pay $250,000 regardless. Under most valued policies, the insurer and the insured agree on a limit that approcimates the current market value of the insured property.

effective date

because benefits aren't payable unless a loss occurs within a policy's coverage period, determining the exact moment an insurance contract's coverage begins and ends is critical. frequently, the policy specifies the effective date and time of the contract. Binders, which apply to property-casualty insurance, and conditional receipts, which apply to property-casualty insurance and conditional receipts, which apply to life insurance have both aided and complicated the law with respect to the effective dates of insurance contracts binders are informal written contracts that summarize the basic coverages and terms of the insurance agreement and provide evidence of insurance until the official policy is issued-unless specific conditions are in place indicating otherwise. (for example, the parties might have an oral agreement that temporary coverage will not be in effect until another insurer assumes part of the risk) the binder should identify the insurer and the insured. If an object such as a car is insured, the binder should describe the car briefly and indicate the amounts of coverage clearly enough to establish policy limits. With agreement on these basic points, the more detailed policy provisions can be determined by referring to the policy the insurer will issue absent qualifying conditions, all policy provisions are effective the moment the binder is created. The binder generally provides an extensions of coverage for 30 days, or until notice of cancellation or a policy is issued. An insurer's cancellation of a binder must conform to the methods the policy prescribes

Contract of Utmost Good Faith

because insurance involves a promise, it requires complete honesty and disclosure of all relevant facts by both parties. For this reason, insurance contracts are considered contracts of utmost good faith. Both parties to an insurance contract- the insurer and the insured- are expected to be honest and forthcoming with each other the insureds has a right to rely on the insurer to fulfill its promises. Therefore, the insurer is expected to treat the insured with utmost good faith. An insurance buyer who intentionally conceals certain infromation or misrepresents certain facts does not act in good faith. Because an insurance contract requires utmost good faith from both parties, an insurer could be released from a contract because of concealment or misrepresentation by the insured.

When applying for auto insurance, Philadelphia Julianna falsely indicated that her car would be garaged for the majority of the year at her beach house in nearby Delaware, where rates are lower. Do you think this could ultimately result in the policy being voidable?

because the location where Julianna garages her auto could affect the premium, her false representation relates to a material fact. Her statement contains the required elements for a plaintiff to establish false representation, rendering the policy potentially voidable.

waiver, estoppel and election

it's not uncommon for an insurer and an insured to disagree on whether a claim is covered under a policy purchased by the insured. however straightforward a claim may appear to be on paper, there are instances where actions or statements of either party can affect which losses are covered by a policy and which ones aren't. To avoid unintentional coverages or forfeiture of possible liability defenses, an insurance professional must be familiar with the contrcat law doctrins of waiver, estoppel and election when an insured sues an insurer for denying coverage, the insurer can consider several defenses, including fraud, misrepresentation, concealment, mistake or breach of a condition- all of which apply in certain instances. The insured, in turn, can argue againstany of these by claiming the insurer lost its right to the chosen defense through waiver, estoppel or election. However,if the insurer proes that none of these doctrines are applicable, it can proceed with its defense

silence or delays, part 2

but what if Gina changed the terms she offered Elijah so they were not exactly the same as the previous annual renewals? For instance, say Gina sent a letter to Elijah indicating that "your homeowners insurance policy will be renewed for a three-year period unless I hear from you to the contrary." If Elijah did not reply, Gina would not be able to interpret his silence as acceptance because there was no prior, similar course of dealings indicating that Gina could do so. Continued coverage would not result automatically. Similarly, if an applicant submits an application for coverage to an insurer and the insurer fails to act within a reasonable time, the insurer's silence or delay does not constitute acceptance. However, an insurer can be liable under its contract if it delays action on an application beyond a reasonable time. In this situation, courts apply the rationale that insurance is a business that holds a public interest. Because insurers generally solicit contractual offers through advertising or sales calls, and because applicants frequently pay premiums in advance, the insurer has a responsibility to act promptly in accepting or rejecting the offer. Some courts consider the obligation an implied contract, while other assert that after the lapse of a reasonable time, the insurer should be estopped or prevented from claiming that the applicant was not accepted

requirements for nonwaiver agreements and reservation of rights letters

certain elements must be present for a nonwaiver agreement or reservation of rights letter to be effective. First, the insurer must communicate the agreement or notice to the insured, usually by letter. Oral notice is not advisable because it would be too difficult to prove that it was received. Second, the notice must be timely. A nonwaiver agreement or reservation of rights prevents estoppel because it gives the insured the option to hire a lawyer to take over the defense from the insurer. Because the notice must give then insured reasonable time to find alternative defense, the insurer's safest course is to give notice as soon as it obtains knowledge of the policy defense the notice must inform the insured fairly of the insurer's position, citing the policy provisions on which the insurer relies and the facts that, if proved, would result in a denial of liability if the insurer has acted in good faith and used ever reasonable method to contract the insured, the insurer can assert it policy defense. For example, a liability that questions coverage under an automobile policy writes six letters informing the insured that it will defend an action but with express reservations of its rights to contest the policy. The insured contends nonreceipt of the letters. Because the letters were addressed to the insured at both the insured's residence and workplace, a presumption arises that the letters were received nonwaiver agreements and reservation of rights letters are usually sent by certified mail with a return receipt requested so that the insurer has evidence that the insured received it. An insured who refuses to sign a nonwaiver agreement might later argue that is had no notice of coverage issued of that insurer and those of the insured. The only way for the insurer to protect itself is to resort to the reservation of rights letter. This unilateral declaration gives notice to the insured that the insurer intends to safeguard its rights to dispute liability under the policy terms and that its conduct in investigating the loss should not be interpreted contradictorily in this respect. in most jurisdictions, nonwaiver agreements and reservation of rights letters are sent only to the insured and can be used on any type of first-party claim. They are not usually sent to third-party claimants because third parties have no obligation under the policy. However, some jurisdictions do require that they be sent to third-party claimants. It is prudent to seek the advice of coverage counsel when contemplating the use of a nonwaiver agreement or a reservation of rights letter.

Concealment

concealment is an intentional failure to disclose a material facts. Courts have held that the insurer must prove two things to establish that concealment has occurred. First, it must establish that the failure to disclose information was intentional, which is often difficult. The insurer must usually show that the insured knew that the information should have been given and then intentionally withheld it. Second, the insurer must establish that the information withheld was a material fact. in the case of an auto insurance applicant, for example, material facts include the use of the applicant's autos, the identity of the drivers, and the ages and driving records of the drivers. If an insured intentionally concelas the material fact that her 16 YO son lives in the household and is the principal driver of one of her cars, the insurer could avoid( reject) the policy based on that concealment insurers carefully design applications for insurance to include questions regarding facts material to the underwriting process. The application includes questions on specific subjects, which the applicant must answer. These questions are designed to encourage the applicant to reveal all pertinent information

delivery of insurance policy

concerning insurance contracts, delivery is defined as placing an insurance policy in the insured's control. For most insurance contracts, no common law or statutory enactment requires delivery of an actual insurance policy to complete its formation. But in cases in which no oral agreement, binder, or other written memorandum exists, the insurer usually is not bound to provide coverage until the policy has been delivered and the first premium payment has been received. Delivery provides evidence of contract formation and communication of the insurer's acceptance of the insured's offer in property-casualty insurance, delivery is rarely in dispute.The wide use of preliminary oral agreements and written binders results in effective dates of coverage that seldom involve the question of policy delivery. Additionally, a property-casualty insurance producer usually collects one of these at the time the applicant completes the application and the producer provides the binder: - a down payment on the premium -complete payment of the premium -a promise of payment by means of a payment plan or premium financing arrangement as in the case of policy delivery, the parties involved can stipulate that the policy is not effective until the first premium payment is made. In the absence of a clear and express agreement, the first premium payment is not usually necessary to establish the validity of an oral preliminary contract, but payment will occur upon policy delivery. even in the absence of an express promise to pay a premium, an implied promise to pay a reasonable premium is sufficient consideration to support an insurance contract. However, if the parties clearly demonstrate that no contract is to form until the first premium payment, then the intent is the determining factor

practice exercise

emily and sofia, a married couple, purchase all of their professional and personal liability and property insurance policies from one agency, Greatview Insurance . After buying a new boat, Emily posted a picture of herself and Sofia with it on social media and then emailed their agent, Garrett, asking to purchase $20K worth of coverage for it, whatever the premium may be. While on vacation, Garret saw the picture and without checking his email, made a note in his daily planner to suggest the women purchase $20K of coverage for their new boat once he was back in his office. Unfortunately, before the two parties could connect and formally arrange coverage, a fire caused severe damage to the boat Explain if loss would be covered. Case Analysis- insurance contract must have these elements: - offer and acceptance -competent parties -mutual or genuine assent -consideration -lawful objective -in the form required by law ( for example, in writing when required) failure to conform to any one of these elements renders the insurance contract unenforceable therefore, emily and sofia's loss would not be covered. Although emily and garret both showed that they intended to form a contract, neither made an offer that was subsequently accepted by the other party

Contract Involving Fortuitous Events and the Exchange of Unequal Amounts, part 2

for example, suppose that an insurer charges a $1,000 annual premium to insure a car valued at $20,000 including auto physical damage coverage. Three situations may occur: - if the car is not damaged while the policy is in force, the insurer pays nothing - if the car is damaged due to a covered cause of loss, the insurer pays the cost of repairs, after subtracting a deductible - if the car is a total loss, the insurer pay $20,000 ( minus any deductible) unless the insurer's obligations in a minor accident happen to come to excatly $1,000 unequal amounts are involved in all three of these cases. However, it does not follow that insureds that have no losses- or only very minor losses- do not get their money's worth or that insureds involved in major accidents profit from the insurance the premium for a particular policy should reflect the insured's share of estimated losses that the insurer must pay. Many insureds have no losses, but some have very large ones. The policy premium reflects the insured's proportionate share of the total amount the insurer expects to pay to honor its agreements with all insureds that have similar policies

other distinguishing characteristics

waiver- requires proof of insurer's act or conduct estoppel- requires proof of act or conduct of both parties to the contract: - insurer's representation of a fact - insured's reliance on act or conduct

distinguishing estoppel from waiver

in insurance law, the distinction between waiver and estoppel is often ambiguous. In some jurisdictions, the terminology has become almost interchangeable. frequently, the doctrines of waiver and estoppel are so closely related in meaning that courts often fail to distinguish them and simply hold that a result is based on what they treat as one theory, the doctrine of waiver and estoppel. however , although the legal effect of the two defenses is the same, they are different in these ways: - estoppel is equitable in nature and arises from a false representation. waiver is contractual in nature and rests upon agreement between parties. -estoppel defeats the inequitable intent of the estoppel party. Waiver gives effect to the waiving party's intention -when proving estoppel, parol evidence is admissible because it is immaterial whether the words or acts leading to estoppel occurred before or after the making of a written contract. That is not the case with a waiver. in the example with Carmen and her disconnected security system, some courts might decline to apply the parol evidence rule regarding the producer's statements but then estop the insurer from treating the policy as void if the elements of estoppel can be found to exist

waiver

in insurance, a waiver exists when an insurer's conduct effectively surrenders a defense to a lawsuit. Waivers can be express or implied, and they relate to defenses based on an insured's misrepresentation or noncompliance with a condition as an example, let's say a homeowner makes a claim for water damage to the contents of his basement. the claims representative asks him to make a list of the items that were damaged and says he can discard the damaged items afterward. under these circumstances, the representative's instructions would result in a waiver of the insurer's right to inspect the contents, which are not longer available. The insurer can't deny the claim later on the basis that the insured failed to make the contents available for inspection for waiver to occur, an insurance policy must already exist. For example, carmen applies for an inland marine insurance policy that allows the insurer to declare the policy void if the insured doesn't maintain a security system at the insured premises. In the application, Carmen notes her intention to disconnect this system later, and the producer says the insurer doesn't intend to enforce the security system clause. because the producer is attempting to waive a future right in a policy that doesn't exist yet, the insurer would not be bound by the waiver and could void the policy after Carmen disconnecte the security system almost any contractual right or privilege can be waived, including any policy provision ( provided that it invovles a right) or standard policy language . an insurer can even waive a policy provision specificallt prohibiting waivers. Examples of matters that aren't subject to waviers, however, are actual facts and privileges that further public policy, such as the requirement that an insured have an insurable interest in the insured property or life. Exclusions are not subject to waiver because, by definition, waivers apply only to rights. an exclusion, in contrast, represents a duty the insurer has chosen not to assume. For example, if an insurance policy excludes coverage for earthquake damage, the insurer has expressly chosen not to assume the duty of paying an earthquake loss under the policy. It can't then waive the exclusion and assume the duty. but what if a producer told the insured that the earthquake exclusion would be waived and the insured's losses would be paid for? While the producer might be liable for this misrepresentation ( bad faith), the insurer would not be liable for the loss.

InContestable Clause

in insurance, it is customary for the parties to agree to not contest the validity of the contract after a certain period, even if the contract is based on a material misrepresentation or the concealment of a material fact This agreement in an insurance contract, the incontestable clause, is required by all states in life, accident and health and group insurance policies unique to insurance, the incontestable clause is contrary to one of the basic maxims in contract law: that "fraud vitiates(negates) consent". Genuine assent can't be based on fraud. in life insurance and accident and health insurance, th maxim is that fraud vitiates consent except in an insurance contract after the contestable period has expired. Therefore, an insurer can't assert material misrepresentation, concealment or frau in connection with life insurance applications when the policy has been in force for longer than the contestable period, usually two years, during the insured's life. The contestable period is a period during which an insurer can challenge the validity of a life insurance policy. The insurer agrees to waive these defenses after this period. Incontestable clauses are considered valid because the insurer has a reasonable oppotunity to investigate an aplicant's statements during the contestable period

necessary terms and implied terms in insurance contracts , part 2

in many line of coverage, statutory and administrative requirements include prescribed policy language. When an oral contract or a binding receipt for homeowners insurance is involved, statutory provisions, such as definition of terms, the right to convert group life insurance to other types of coverage and life insurance coverage in the event of suicide in circumstances under which an oral or informal contract results in a matter of coverage being brought before a court, the parties involved will use these required elements of a contract to create a basis on which they can build. Afterward, they and the court can turn to several other sources of information-including previous dealings between the parties, customary usage of terms and legal requirements- to determine the terms of the contract that was in force previous dealings between the parties provide the most accurate bases for determining terms of an insurance contract that were implied. For example, if an insured has requested that a producer " renew my fire policy", it is implied that the renewed policy will have all the terms of the previous policy, including the coverage and premium amounts. An insurer's customary usage of terms provides another important source for establishing terms the parties have not mentioned explicitly, such as the type of policy an insurer usually issues in a given situation or the type of policy most insurers usually issue

offer and accetance, part 3

in property- casualty insurnace, oral contrats are as binidng as written ones. When the insurance producer has authority to enter into oral agreements to bind coverage, the parties' words and conduct govern the offer and acceptance just as with any other contract for example, elin calls her insurance agent asking to immediately increase the limits on her policy and the agent tells her "done! we'll send you the revised policy in the mail." before elin receives the updated policy , she suffers a loss that exceeds the previous limits of her policy. The agent's oral promise is binding and will hold the insurer responsible for the promised higher coverage limits. However, if an agreement between a prodcuer and a prospective insured does not specify immdiate coverage, examination of the parties' conversations as well as the producer's authority would be necesary to determine the policy's effecitve date]=

insurance as third-party beneficiary contract

insurance contract illustrate many of the ways third parties can benefit from agreements. In a life insurance policy, for example, the contract between the insured and the insurer is for the benefit of a third person, the beneficiary. property insurance also can provide benefits to third parties in some circumstances, particularly when property interests are being transferred or when interests in real estate are limited or shared

Special Characteristics of Insurance Contracts

insurance contracts must contain all the necessary elements of a legally enforceable contract, so they are similar to other contracts in many ways. However, insurance contracts have distinctive features and their own body of law. in addition to having the essential elements of all contracts, valid insurance contracts have certain special characteristics

third party interests in liability insurance

liability insurance protects against loss resulting from injury or damage to a third person that the insured causes, usually by negligence. Although a named insured obtains the policy, the protection can extend to others, such as additional drivers of an insured's car the victims of an insured's negligence also benefit from liability coverage. In recent years, some states have adopted direct-action statutes. In most jurisdictions, however, the purpose of liability insurance is to indemnify only insureds for their losses in paying damages to the victims. In these situations, the third-party victims can't sue under the liability policies until courts have ordered judgments against the insureds. If an insurer denies claim payments after a judgement, some states allow a third party to sue the insurer directly in a statutory action known as garnishment

when a lie is not a lie

most of the oncfusion in insurance law regarding misrepresentation comes from automobile insurance cases. for example, in completing an application for auto insurance, Ella must indicate where the car is principally garaged and whether she has had an accident within the past five years. She answers that she hasn't been involved in any accidents, believing her last one was six or more years ago, when it actually happened four years ago. Because the insurer might not have issued the policy if it had the correct information, the representation is material. however, because Ella answered in good faith, mistakenly beleiving the accident occurred more than five years ago, the insurer can't avoid the policy issues regarding misrepresentation can also arise expressions of opinion. Statements of opinion and belief involve judgment, possible inaccuracy and personal viewpoint, rather than obejective fact. because an insurer is expected to recognize subjectively, courts frequently require evidence of fraudulent intent before they permit avoidance of the policy. because statements of opinion are to establish that the insured spoke fraudulently for example, a person owns a building with an actual value of $400K and carries a mortgage of $250K. In applying to insure the building, the building's value is an opinion and although the amount estimated is far from accurate, that fact alone does not justify the insurer's avoidance of the policy. the insurer must show that the applicant did not hold this opinion and fraudulently misrepresented the value. silence is another situation that can raise quetsions in regard to msirepresentation. because misrepresentation requires an active statement or conduct, such as shaking one's ead, mere silence on an insured's part can't be interpreted as a representation. for example, if Ella didn't hear the insurance and the agent interpreted her ensuing silence as "no" ella most likely would not be held to account for misrepresenting her driving record

use of nonwaiver agreements and reservation of right letters

nonwaiver agreements and reservation of rights letters help solve the insurer's dilemma of whether to investigate a loss. They inform an insured that the insurer's activities regarding the loss do not preclude it from standing on policy provisions. An insurer might be able to establish that is it not liable under the policy. The insurer can continue to investigate and evaluate the loss on its merits , an activity beneficial to both the insurer's and insured's interests. simultaneously, the insurer can determine whether the insured has violated policy terms and whether the insurer will accept liability under the policy. When the insurer, knowing of grounds for forfeiture or noncoverage, manages the defenses of a lawsuit against its insured without giving timely notice of its reservation of rights, it can't refuse coverage on those grounds

Real Estate Sellers and Buyers

real estate buyers have loss exposures, even though they may be unaware of them. A real estate buyer obtains an equitable interest in the property as soon as both parties sign the agreement of sale. The real estate belongs to the buyer, subject to the payment of the purchase price, under the doctrine of equitable conversion although the rules are clear in most jurisdictions, the time between signing the real estate sales contract and the closing in known as the executory period: it can be a murky issue for someone without a law degree. During that time, which often lasts a month or longer, the seller retains legal title but the buyer assumes equitable title. The bottom line for buyers in most states is that they face the hidden but huge exposure of bearing the risk of damage from the time of signing. If the property is destroyed before it is legally transferred, the buyer must still pay the full purchase price. The buyer can avoid bearing the risk of loss by including a provision in the sales contract that places the burden of any loss on the seller until actual title transfer. After transfer, of course, the loss exposure shifts to the buyer, terminating the seller's risk

representations and warranties in insurance

representations and warranties, although similar in nature, can have drastically different results when falsified or proved untrue. Insurance professionals need to understand the differences between the two concepts to best serve both their clients and the insurers they represent when an applicant contacts an insurer about purchasing an insurance policy, any statements he or she makes concerning the possible contract, whether written or oral, are considered a representation. meanwhile, warranties, as they pertain to an insurance policy, are statements that, if untrue, would render the policy voidable, whether or not they are material. Because the relationship between an insured and an insurer is imbalanced in favor of the insurer, courts tend to interpret the applicant's statements as representations rather than as warranties

silence or delay

sometimes one party to a contract may try to use another party's silence or slow movement on a deal as evidence of agreement. One party might send a contract to a potential partner in a deal and say " if you do not reply to this offer within seven days, that will be interpreted as acceptance, and this contract will go into effect immediately". However, because contract law requires unequivocal manifestation of both parties' mutual assent in either words or conduct, a party's silence or delay is usually interpreted by common-law courts as insufficient acceptance to form a contract as with all rules, there is an exception: if a prior course of dealings shows that silence indicated acceptance, then future iterations of of those prior dealings could consider silence to be acceptance for example, Gina, a producer has for many years provided insurance on Elijah's property through annually renewed policies. Let's say that, at the expiration of a policy and consistent with prior dealings that were accepted, Gina sends Elijah a renewal policy and a bill for the premium. This year, Elijah holds the policy for two months, remaining silent and then refuses to pay the premium on demand. Elijah may be liable for the premium that accrued before his rejection because the course of prior dealings between the parties gave Gina, the offeror and produce, a reasonable basis for concluding that silence constituted acceptance

statutory approaches to misrepresentation

state statutes may limit an insurer's misrepresentation defense by requiring the misrepresentation to be intentional, material or a combination of both. Additionally, many states have enacted statues to permit a materially defense based on the effect of an alleged misrepresentation: 1) increase of risk statutes are more common and set either an objective or a subject standard for determining materiality. As an example, under such a statute, an insured's representation that, contrary to fact, no driver under 25 years of age lives in his or her household would be misrepresentation of a material fact. 2) contribute-to-loss statues are less common but modify the law more radically. Generally, the rule under these statutes is that a misrepresentation does not allow an insurer to avoid the contract if it could not contribute to the loss. Using this theory, a court could find, for example, that a contribute-to-loss statute prohibits an insurer from avoiding a homeowners insurance policy if the misrepresentation relates to a statement that the insured had never been refused other insurance or to the fact that an insured had other concurrent or additional, insurance in violation of the policy

election description

the essence of the election doctrine is that a choice of one available right might imply relinquishment of another available right. For example, under a fire policy, the insurer has the option of repairing or rebuilding instead of paying monetary compensation for a loss. An insurer whose words or acts led an insured to expect monetary compensation having elected one method of discharging its duty under the policy. The insurer, having elected one method of making the insured whole ( monetary compensation) has then lost the right to choose the second alternative ( repairing or rebuilding) . Election applies even though the insurer has not voluntarily relinquished a known right, as would occur with a waiver. the doctrine of election also applied to choices by the insured. For example, an insurer cancels a life insurance policy including provisions for the payment of disability benefits. The insured elects to sue the insurer for fraudulent breach of the contract and receives damages, but not reinstatement of the policy. Later, the insured attempts to sue to recover disability benefits that would have accrued before the previous lawsuit had it not been for the insurer's cancellation of the policy in the first suit, the insured alleged a breach of contract and a right to damages. In the second suit, the insured demanded benefits that would have been payable absent a breach of contract. The insured elected to treat the policy as canceled in the first lawsuit, barring the pursuit of the second remedy, disability benefits, which would have been on the assumption that the policy had not been canceled. Some legal observers would say that election is a way for a court to apply estoppel when there is no reliance. The suggestion is that some courts start with the desired result, then try to find a theory under applicable state law to reach that result; then try to find a theory under applicable state law to reach that result; if election is a developed theory in the state and waiver isn't , they'll go with election.

nontransferable contract

the idenitities of the insured persons or organizations are extremely relevant to the insurer, which has the right to select those applicants with which it is willing to enter into contractual agreements. After an insurance policy is in effect, an insured may not freely transfer, or assign, the policy to some other party. If such a transfer were allowed to take place, the insurer would be legally bound to a contract with a party it might not wish to insure. Most insurance policies contain a provision that requires the insurer's written permission before an insured can transfer a policy to another party traditionally, insurance textbooks describe insurance as a personal contract to indicate its nontransferable nature, and they cited clauses in property policies to illustrate the priciple. The policy language does differ between typical property and liabilty policies, but in both types, the intention is to prohibit the insured from transferring the policy to another party without the insurer's consent.

contract of indemnity

the purpose of insurnace is to idemnify insureds that suffer a loss. To indemnify is to restore a party that has had a loss to the same financial position it held before the loss occurred. Most property and liablity insurance policies are contracts of indemnity. Property insurance generally pays the amount of money necessary to repair coverd property that has been damaged or to replace it with similar property. The policy specified the method for determining the amount of the loss. For example, most auto policies, both personal and commercial, specify that vehicles are to be valued at their actual cash value ( ACV)at the time of a loss. If a covered accident occurs that causes a covered vehicle to be a total loss, the insurer will normally pay the ACV of the vehicle, less any applicable deductible Liabilty insurance generally pays to a third-party claimant on behalf of the insured, any amounts ( up to the policy limit) that the insureds becomes legally obligated to pay as damages because of a covered liabilty claim, as wellas the legal costs associated with that claim. For example, if an insured with a liability limit of $300,000 is ordered by a court to pay $100,000 for bodily injury incurred by the claimant in a covered accident, the insurer will pay $100,000 to the claimant and will also pay the cost to defend the insured in court.

Elements Required to Establish False Representation, part 2

the second element of misrepresentation is that the false statement relates to a material fact. in other words, the false representation must be one that the insurer relied on in deciding whether to enter the contract. For example, consider a homeowners insurance application representing that a house is made of brick when it actually is made of wood. This application contains a misrepresentation of a material fact because the insurer will assume a much different loss exposure than the truth would suggest. In this example, the insurer could probably avoid the policy, assuming that its reliance on the representation was reasonable. However, if the applicant says the house is white when it's actually blue, the statement would not relate to a material fact even though it would be misrepresentation Depending on the jurisdiction, a court may determine materiality on two different bases: - Objective reasonable insurer standard- the court asks, essentially" What would a reasonable insurer have done with knowledge of the true facts? the court examines what most insurers would have done in a similar situation - Subjective individual insurer standard- the court asks, essentially, "What should this insurer have done with knowledge of the facts misrepresented? " the third element that's necessary to prove misrepresentation is that the insurer relied on the statement. If an investigation reveals that the insurer had the duty to conduct further inquiry, it may be difficult for the insurer to claim reasonable reliance. And if the insurer discovered the falsity of a representation before issuing a policy, it can't then claim reliance on it

Contract of Adhesion

the wording in insurance contracts is usually drafter by the insurer( or an insurance advisory organization) enabling the insurer to use preprinted forms for many different insureds. Because the insurer determines the exact wording of the policy, the insured has little choice but to take it or leave it- that is, the insured must adhere to the contract drafted by the insurer. Therefore, insurance policies are considered to be contracts of adhesion, which means that one party ( the insured) must adhere to the contract as written by the other party ( the insurer). This characteristic significantly influences the enforecement of insurance policies. If a dispute arises between the insurer and the insured about the meaning of certain words or phrases in the policy, the insured and the insurer are not on an equal basis. The insurer either drafted the policy or used standard forms of its own choice; in contrast, the insured did not have any say in the policy wording. for that reason, if the policy wording is ambiguous, a court will generally apply the interpretation that favors the insured. Another common term regarding this ambiguity in contracts is the doctrine of contra proferentem, sometimes paraphrased sa "interpretation against the drafter". This doctrine is applied to interpretation of contractual language. When an insurance polcy phrase or term is ambiguous, a court will generally apply the interpretation that favors the insured, not the drafter 9 the insurer) Importantly, insurance professionals should know that some states will not apply this doctrine if the state had required the specific policy language in question

Elements Required to Establish False Representation

three elements are required for a plaintiff insurer to establish false representation: - a statement is made that is false or misleading - the statement relates to a material fact - the insurer relies on the false or misleading statement in issuing the policy the applicant's lack of intent to deceive or reckless disregard for the truth distinguishes misrepresentation from fraud. Generally, even an innocent misrepresentation, if both material and relied on by the insurer, makes the contract voidable. However, statutory language sometimes specifies that the misrepresentation must be willful or intentional representations and misrepresentations refer only to those conditions existing at the time the parties from the contract. So, if Brittany informs her insurer that there are no other legal- age drivers in the household and then, three years later, her child reaches the legal driving age, her previous statement can't be interpreted as a misrepresentation misrepresentation exists when a false or misleading statement has been made. While an insurer might easily verify some facts during the application process- such as the type of building construction, the make and model of a car or the location of property- other facts are not so easily verifiable and the insurer may have to depend on the applicant's word.

necessary terms and implied terms in insurance contracts

to be valid and complete, an agreement to insure must contain these components: 1) types of coverage sought- the risks or events covered must be specific, such as fire, accident, liability or life 2) object or premises, if any, to be insured- If, for example, liability insurance in connection with ownership of property is involved, the address of the premises must be clear. if the policy says only " my residence" and the proposed insured has several residences, the identification is ambiguous and can result in no coverage 3) amount of insurance- this component establishes policy limits and the insurer's liability 4) insured's name 5) duration of coverage- in some cases, duration of coverage might be implied from the parties' past dealings

an example of misrepresentation

when Victor purchased his new car, he told the insurance agent that it would be used only for recreation and personal errands. He promised it would not be used for business purposes. Once he obtained coverage, however, Victor used the car to meet with potential clients, sometimes driving hundreds of miles in a week. After Victor was involved in an accident with the car during one of his business trips, his insurer attempted to avoid the insurance contract Each of the three elements required to establish false representation can be seen in this scenario: 1. Victor's statement that he would not be using the car for work was false. 2. The misleading statement related a material fact, namely, how much use (loss exposure) the car would receive. Greater exposure generally leads to higher premiums. 3. the insurer relied on Victor's statements that he would use the car only for recreation and personal errands when it calculated his premium. There was no guarantee that the insurer would have offered coverage if it knew how much Victor would actually use the car. victor made a misleading statement about a fact material to the insurance contract. Therefore, the insurer may be able to avoid the insurance contract (policy), citing the defense of false representation if Victor sues over the insurer's refusal to cover the damages

offer and acceptance

when a producer contacts a prospectve insured, he or she is not offering to provide insurance coverage. Rather, the producer is looking to collect offers in a contractual sense , from prospective insureds to pass on to insurers. An insurance application, signed by the applicant and sent to the insurer through the producer, is an offer. If the insurer agrees to provide coverage for the insured, the insurance policy that is ussed will be the acceptance . If the policy the insurer issues does not conform to the application- the initial offer- the policy would be conisdereda counteroffer and the applicant would have to provide specific acceptance for the contract to become binding to both parties As an example, if Gibson Repairs, a single location auto repair shop, works through a brokre to apply for property and liabilty coverage from a specific insurer, the application would be conisdered an offer. if the insurer receives the application and issues a policy for the exact coverages Gibson requested, that would be considered the acceptance, and a contract would be formed between the two parties. However, if the policy provided by the insurer included less coverage than Gibson requested, that would be a counteroffer and the contract would not be complete until Gibson provided in accpetance

factors establishing estoppel

when an insured seeks to assert in defense of a contract the insurer is seeking to avoid, he or she must come to court with "clean hands". That is, the insured must not have committed fraud or acted in bad faith and must be able to show that he or she acted in good faith and in reasonable reliance on the insurer's representation estoppel applies when an insurer's producer misinterprets questions or falsifies answers in an application, causing the insurer to issue a policy based on misleading information. Because the producer made the misrepresentation, the insurer can't avoid a contract based on the fact that the statements are not true similarly, if an insurer's producer states that agreed upon acts have occurred when they have not, that representation might be subject to estoppel. For example, if a producer says an endorsement will be added to a policy to permit a building to be unoccupied for certain periods, and the policy issues without that endorsement, the insurer must honor the intended endorsement. The fact that the insured failed to check the policy does not negate the element of reasonable reliance. In the legal arguments to establish estoppel in this circumstance, oral evidence would be admissible

Contract Involving Fortuitous Events and the Exchange of Unequal Amounts, part 1

while noninsurance contracts involve an exchange of money for a certain event, such as the provision of goods or services, insurance contract involve an exchange of money for protection upon the occurrence of uncertain or fortuitous events. Insurance contracts also involve an exchange of unequal amounts. Often, few or no loss occur and the premium paid by the insured for a particular policy is more than the amount paid by the insurerto or on behelf of the insured. If a large loss occurs, however, the insurer's claim payment might be much more than the premium paid by the insured. The possibility that the insurer's obligation may be much greater than the insured's makes the insurance transaction a fair trade.