Blaw Ch. 50: Insurance

• An insurance comp can raise any of the defenses that would be valid in an ordinary action on a contract, as well as the following defenses:

(1) Fraud or misrepresentation - if the insurance comp. can show that the policy was procured through fraud or misrepresentation, it may have a valid defense for not paying on a claim (the insurance comp. may also have the right to disaffirm or rescind the insurance contract) (2) Lack of insurable interest - an absolute defense exists if the insurer can show that the insured lacked an insurable interest - thus rendering the policy void from the beginning (3) Illegal actions of the insured - improper actions, such as those that are against public policy or that are otherwise illegal, can also give the insurance company a defense against the payment of a claim or allow it to rescind the contract

There are several common varieties of life insurance:

(1) Whole life (2) Limited-Payment Life (3) Term (4) Endowment (5) Useful Life

AUTOMOBILE INSURANCE Standard automobile insurance combines the following:

(1) liability coverage (2) collision coverage (3) comprehensive coverage (4) uninsured motorist coverage (5) omnibus coverage (6) towing/rental coverage Automobile insurance may also include medical payment coverage, accidental death coverage, and other provisions.

-other-driver coverage

- an omnibus clause (or other-driver clause) protects the vehicle owner who has taken out the insurance and anyone who drives the vehicle with the owner's permission. -This coverage may be held to extend a third party who drives the vehicle with permission of the person to whom the owner gave permission

-Accidental death benefits (sometimes referred to as double indemnity)

- provide for a payment of twice the policy's face amount if the policyholder dies in an accident. This coverage generally costs very little, but it may not be necessary if the insured has a sufficient amount of life insurance

-medical payment coverage

- provided by an auto insurance policy pays hospital and other medical bills and sometimes funeral expenses. -This type of insurance protects all the passengers in the insured's car when the insured is driving

When a broker deals with an applicant for insurance

- the broker is the applicant's agent (and NOT the agent of the insurance comp.)

Insurance Policy

A contract in which, for a stipulated consideration, one party (the insurer, or underwriter) agrees to compensate the other (the insured), or the other's heirs or assigns, for a particular, stated loss.

Life Insurance Creditors' Rights:

Absent some state law exempting insurance proceeds from collection by judgment creditors (something almost every state does to some degree), proceeds payable to the insured's estate and to any non-vested beneficiary are subject to attachment by the insured's creditors.

Incontestability Clause:

After a life or health policy has been in effect for a statutorily-determined period (usually 2-3 years), the insurer may not go back and contest the accuracy of any information contained in the application.

Applicant's Duty to Disclose:

An applicant must disclose any fact material to an insurer's decisions to issue a policy, what to cover, or what premium to charge. insured's duty to inform

Insurable Interest: Property

An insurable interest in property must exist at the time the loss occurs.

Insurable Interest: Personal

An insurable interest in someone's life or health must exist at the time the policy takes effect.

Life Insurance Termination:

An insured can cancel her life insurance at will; an insurer can typically only terminate coverage if (1) the insured fails to pay premiums when due; (2) the stated duration of the policy expires; (3) the insured cancels the policy; or (4) the insured dies and the insurer pays the policy benefits.

Defenses:

An insurer may avoid liability for failing to pay a first-party claim or to defend a third-party claim by proving that the insured lacked an insurable interest or by asserting in good faith any applicable contract defense.

Cancellation:

An insurer must have good cause to cancel a policy prior to its lapse and must give the insured prior notice, so that the insured can either appeal the decision or find suitable replacement coverage.

Insurable Interest

An interest either in a person's life or well-being or in property that is sufficiently substantial that insuring against injury to or the death of the person or against damage to the property protects against the loss of reasonably expected benefits.

Effective Date:

As a general rule, coverage does not begin until a policy is issued by the insurer, unless the insurer's agent issues a binder - a temporary policy in effect from the application date until the date the policy issues or is denied.

o ________ relationships give a person insurable interest in the life of another

Close family relationships ♣ A husband can take out an insurance policy on his wife and vice versa, or parents can take out life insurance policies on their children

BUSINESS LIABILITY INSURANCE

Comprehensive General Liability ("CGL") Policy product liability professional malpractice workers' compensation

Interpreting Policy Terms:

Courts generally interpret and construe against the insurer (and in favor of the insured or third party) any policy provision whose meaning or effect is unclear

automobile insurance Collision Coverage:

Covers damage to the insured's car in any type of collision (regardless of fault); • Usually, it's not advisable to purchase full collision coverage (otherwise known as zero deductible) - the price per yr is relatively high because it's likely that some small repair jobs will be required each yr. o Most people prefer to take out policies with a deductible of $250, $500, or $1,000, which cost substantially less than zero-deductible coverage

BUSINESS LIABILITY INSURANCE Workers' Compensation:

Covers injuries to workers occurring within the course and scope of the worker's employment on behalf of the insured. In some states, workers' compensation insurance is underwritten by the state.

automobile insurance Comprehensive Coverage:

Covers loss or damage to the vehicle by fire, hail, vandalism, theft, etc. (hurricane);

automobile insurance Liability Coverage:

Covers personal injury and property damage caused by the insured's operation of any vehicle and/or by the insured's vehicle; • Liability limits are usually described by a series of 3 numbers, such as 100/300/50 - this means that for one accident the policy will pay a maximum of $100,000 for bodily injury to one person, a maximum of $300,000 for bodily injury to more than one person, and a maximum of $50,000 for property damage • Many insurance companies offer liability coverage in amounts up to $500k and sometimes higher

automobile insurance Towing/Rental Coverage:

Covers the cost of towing the insured's damaged vehicle and of a rental while the insured's vehicle is being repaired.

automobile insurance Omnibus Coverage:

Covers the vehicle owner and any third party who drives the vehicle with the owner's permissions; and

Insured's Duty to Inform:

Depending on the type of coverage and the insurance policy's language, an insured may have a duty to inform the insurer of a change in circumstances during the policy term that might materially affect the scope of coverage, the appropriate premium, or the applicability of an exclusion.

In order to avoid coverage, there must must be a

EXPLICIT EXCLUSION In the absence of an explicit exclusion, courts generally find the life insurer liable regardless of the cause of the insured's death.

Life Insurance Change of Beneficiaries:

Generally, the insured may add, delete, or replace beneficiaries without needing the insurer's or the existing beneficiary's consent. However, if a beneficiary's interest has vested, the insured must obtain the vested beneficiary's consent.

Multiple Coverage Clause:

If property is covered by more than one policy, each insurer pays pro rata. o Many insurance policies include a clause providing that if the insured has multiple insurance policies that cover the same property and the amount of coverage exceeds the loss, the loss will be shared proportionately by the insurance companies (relative to the total amount of insurance)

Arson:

If the insured (or an agent of the insured) intentionally sets the fire for the purpose of causing property damage (or personal injury), any property damage so caused will be excluded.

Coinsurance Clause:

If the owner insures at least a minimum percentage of the property's value, the insurer will cover any property loss up to the policy limit. o Many property insurance policies include a coinsurance clause that applies in the event of a partial loss and determines what percentage of the value of the property must be insured for an owner to be fully reimbursed for a loss. o If the owner insures the property up to a specified percentage (typically 80 percent) of its value, she or he will recover any loss up to the face amount of the policy o If the insurance is for less than the fixed percentage, the owner is responsible for a proportionate share of the loss (in effect, the owner becomes a coinsurer) o Applies only in instances of partial loss

Agreed Delayed Effective Date:

If the parties agree that the insurance will be issued at some later date, any loss sustained in the interim is not covered.

BUSINESS LIABILITY INSURANCE Professional Malpractice:

Indemnifies an attorney, accountant, architect, engineer, or physician from losses attributed to their negligent performance of their professions. • The large judgements in some malpractice suits have received considerable publicity and are sometimes cited in discussion of what has been called "the insurance crisis," because they have contributed to a significant increase in malpractice insurance premiums

BUSINESS LIABILITY INSURANCE Comprehensive General Liability ("CGL") Policy:

Indemnifies the insured from any risks the insurer agrees to cover, such as premises liability, product liability, environmental contamination, negligence in the course of business, etc. • It can protect a business from liability for injuries arising from on-premises events held after work hours (such as company social functions) • It can protect bars and liquor stores (which in many jurisdictions are liable when a buyer of liquor becomes intoxicated as a result of the sale and injures a third party) • Can protect a business not only from liability for physical injuries, but also from liability for the loss of financial support suffered by a family because of the injuries

BUSINESS LIABILITY INSURANCE Product Liability:

Indemnifies the insured manufacturer from claims resulting from its products, and may also reimburse the manufacturer for any expenses related to product recalls and the repair or replacement of defective products. (the coverage may include payment for expenses incurred to recall and replace a product that has proved to be defective)

Homeowner's Insurance Liability Coverage:

Indemnifies the policyholder in the event of personal injuries on the policyholder's property, personal injuries caused by the policyholder, but not in an automobile, and damage done by the policyholder to someone else's property.

Risk Management

Insurance is premised (based) on spreading the risk of loss among a large number of people, reducing the premium that any one person must pay to afford the coverage offered. (insurance is classified according to the nature of the risk involved)

automobile insurance Uninsured Motorist Coverage:

Insures the driver and passenger(s) against personal injury caused by another driver without insurance or by a hit-and-run driver (some states require that it be included in all auto insurance policies sold);

Life Insurance Misstatement of Age:

Life insurance premiums and benefits may be affected by the age of the insured. As a result, if the insurer finds that the insured misstated her age at the time she applied for the policy, the insurer may subsequently change the premiums due and the benefits payable to reflect the insured's true age.

Life insurance: Covered Risks:

Most life insurance policies exclude coverage for, e.g., suicide, war, the insured's involvement in or conviction for a crime punishable by death.

Insured's (Other) Continuing Duties:

Once covered, an insured must (1) pay premiums on or before their due date, (2) timely notify the insurer of any event that may give rise to a claim against the policy, and (3) cooperate with the insurer's investigation of any claim and any litigation in which the insured and the insurer are not adverse parties.

Anti-Lapse Clause:

Prevents automatic cancellation on expiration, giving the insured a "grace period" to renew (usually 30-31 days). o Provides that a life insurance policy will not automatically lapse if no payment is made on the due date o Ordinarily, under such a provision, the insured has a grace period of thirty or thirty-one days within which to pay an overdue premium before the policy is cancelled

Renter's Insurance:

Protects a renter's personal property from loss or damage due to fire, lightning, theft, and other perils, and generally covers the expense of dislocation due to damage to or destruction of the rented premises.

HOMEOWNER'S INSURANCE Property Coverage:

Protects the house, garage, other private buildings on the policyholder's lot, and their contents, as well as personal property of the policyholder while traveling or used at work (subject to certain limits and exceptions), from loss or damage due to fire, lightning, theft, and other perils. renter's insurance

FIRE INSURANCE Coverage:

Protects the property owner against damage due to fire, lightning, and smoke, as well as water damage attributable to extinguishing the fire, subject to timely submitting proof of loss to the insurer or its agent.

Appraisal/Arbitration Clause:

Provides a means of resolving disputes between the insured and the insurer over the value of the property damaged. appraisal clause - included in every insurance policy, there's always going to be one o Most fire insurance policies provide that if the parties cannot agree on the amount of a loss covered under the policy or on the value of the property lost, an appraisal can be demanded o It's an estimate of the property's value determined by a suitably qualified individual who has no interest in the property o Typically, two appraisers are used, with one appointed by each party

INSURANCE COVERAGE

The heart of an insurance policy is the coverage it affords, as limited by various exclusions and exceptions in the policy.

Application:

The insurance application is generally made a part of the contract if and when a policy issues; therefore, the applicant is bound by any false statements or misinformation in the application, which may void the policy if discovered.

fire insurance Assignment:

The insured generally cannot assign its policy without the insurer's consent.

Cancellation:

The insured may cancel a policy at will. • The insured can cancel a policy at any time and the insurer can cancel under certain circumstances

Occupancy:

The insured or an authorized tenant must occupy the premises at the time of the fire.

fire insurance Liability Limits:

The insurer's liability is determined by the terms of the policy. Typical limitations include: (1) "friendly" fires (2) arson (3) valuation limits (4) occupancy

Valuation Limits:

The policy covers only a certain amount of loss regardless of the actual loss suffered.

"Friendly" Fires:

The policy limits or excludes coverage of fires burning in places designed for fire (e.g., fireplaces); though, if the fire spreads from the intended place, the additional loss should be covered.

Premium

The price the insured pays the insurer for a policy of insurance for a specified period of time (the consideration paid to the insurer), and the insurance company is sometimes called an underwriter

• As a general rule, the insurance company is bound by the acts of its agents when they

act within the scope of the agency relationship (state law usually determines the status of all parties writing or obtaining insurance)

• If there's ambiguity in the policy, the provision generally is interpreted

against the insurance company

Insurance contracts usually are obtained through

an agent, who normally works for the insurance company, or through a broker, who is ordinarily an independent contractor

It is important to distinguish between

an insurer's authorized agent, who has the authority to bind the insurer, and a third-party broker, who does not.

• Individuals who are dissatisfied with the maximum liability limits offered by regular automobile insurance coverage can purchase separate coverage under

an umbrella policy o Umbrella limits sometimes get as high as $10 million o Umbrella policies also cover personal liability in excess of the liability limits of a homeowner's policy

FORMING THE INSURANCE CONTRACT

application effective date

INSURED'S RIGHTS, DUTIES & DEFENSES

cancellation applicant's duty to disclose insured's continuing duties

INSURER'S RIGHTS, DUTIES & DEFENSES

cancellation insurer's duty to pay or defend defenses

Endowment

for which the insured pays premiums for a fixed term, after which the insurer pays the insured or (on the death of the insured during the specified period) her designated beneficiary a fixed amount; and o This type of insurance represents both term insurance and a form of annuity (the right to receive fixed, periodic payments for life or - as in this instance - for a term of years) o Has a rapidly increasing cash surrender value, but premiums are high because a payment must be made at the end of the term even if the insured is still living

Limited-Payment Life

for which the insured pays premiums for a set number of years, after which the policy is fully paid; o For instance, a policy might call for 20 payments. Naturally, premiums are higher than for whole life and this insurance also has a cash surrender value

exclusions and exceptions that can limit coverage (5)

incontestability clause coinsurance clause appraisal/arbitration clause multiple coverage clause anti-lapse clause

In contrast, an insurance agent is an agent of the

insurance company, NOT an agent of the applicant

An applicant who seeks coverage from an insurer's agent is typically covered against

losses that occur while the application is pending.

An insurer who refuses to pay, settle, or defend a covered loss may be liable for

more than the policy limit.

• Insurable interest under life insurance

o A person must have a reasonable expectation of benefit from the continued life of another to have insurable interest in that person's life. o The insurable interest MUST exist at the time the policy is obtained o The benefit may be pecuniary (monetary), or it may be founded on the relationship between the parties (by blood or affinity)

• Case: Valero v. Florida Insurance Guaranty Association, Inc. (2011)

o Alberto and Karelli Mila were insured under a liability policy. The policy, in "exclusion k," stated that coverage did not apply to "bodily injury arising out of sexual molestation, corporal punishment or physical or mental abuse." o Valero, on behalf of her child, filed a suit in a Florida state court against the Milas, charging them with negligent supervision of a perpetrator who sexually molested Valero's child. o The Milas filed a claim with their insurer to provide a defense against the charges. o The insurer had become insolvent and the claim was submitted to FIGA (nonprofit corporation created by the Florida legislature that evaluates the outstanding claims of Florida policyholders of property and casualty insurance companies that have become insolvent and have been ordered to liquidate and attempts to resolve these claims that must be paid to avoid hardship for the claimants) o The association refused to pay the Milas' claim and asked the court to rule that it had no obligation under the policy to provide such a defense and the court issued a summary judgement in their favor, but Valero and the Milas appealed, arguing that exclusion k was ambiguous o Decision and remedy: a state intermediate appellate court affirmed the lower court's judgement and agreed that the language in the Milas' policy excluding coverage for "bodily injury arising out of sexual molestation" was clear and unambiguous. The exclusion applied to preclude (prevent) coverage in this case

• In some situations, the insurance comp. may be PREVENTED, or estopped, from asserting defenses that normally are available.

o For instance, an insurance comp. ordinarily cannot escape payment on the death of an insured on the ground that the person's age was stated incorrectly on the application. o Also, incontestability clauses prevent the insurer from asserting certain defenses

• Example: Green insured $50k worth of property with 2 companies. Each policy had a liability limit of $40k. If the property was totally destroyed how much can he collect?

o If the property is totally destroyed, Green can collect only $25k from each insurer

• Key-Person Life Insurance

o Insurance obtained by an organization on the life of a person who is important to that organization o Because the organization expects to experience some financial gain from the continuation of the key person's life or some financial loss from the key person's death - the organization has insurable interest o Small company: typically will insure the lives of its important employees because the firm will sustain some degree of loss if they die o A corporation: has insurable interest in the life of a key executive (such as a talented CEO) whose death would result in financial loss to the company

• There are four general types of insurance coverage:

o Life insurance o Fire and homeowners' insurance o Automobile insurance o Business liability insurance

• Neal applies to Farm Insurance Company for a life insurance policy. On the application, he understates his age. He obtains the policy, but for a lower premium than he would've had to pay had he disclosed his actual age. The policy includes an incontestability clause. Six yrs. later, he dies. Can the insurer refuse payment? Why or why not?

o No, an incorrect statement as to the age of an insured is a misrepresentation o Under an incontestability clause, however, after a policy has been in force for a certain time (usually for 2 or 3 yrs), the insurer cannot cancel the policy or avoid a claim on the basis of statements made in the application

• Al is divorced and owns a house. He has no reasonable expectation of benefit from the life of Bea, his former spouse, but applies for insurance on her life anyway. Al obtains a fire insurance policy on the house and then sells the house. He continues to pay the premiums on both the life insurance policy and fire insurance policy. Ten years later, Bea dies and the house is destroyed by fire. Can Al obtain payment for these events? Explain.

o No, to obtain insurance, one must have sufficiently substantial interest in whatever is to be insured ♣ One has an insurable interest in property if one would suffer a pecuniary loss from its destruction ♣ This interest must exist when the loss occurs o To obtain insurance on another's life, one must have a reasonable expectation of benefit from the continued life of the other ♣ The benefit may be founded on a relationship, but "ex-spouse" alone is not such a relationship ♣ An interest in someone's life must exist when the policy is obtained

• Case: Zurich American Insurance Co. v. ABM Industries Inc. (2005)

o Property insurance case o ABM Industries, Inc., operated the heating, ventilation, and air-conditioning systems at the World Trade Center (WTC) in NYC in 2001 o ABM also maintained all of the WTC's common areas o At the time, ABM employed more than 800 workers in the WTC o Zurich American Insurance Company insured ABM against losses resulting from "business interruption" caused by direct physical loss or damage "to property owned, controlled, used, leased or intended for use" by ABM o After 9/11, ABM filed a claim to recover the loss of all income derived from its WTC operations o Zurich argued that the recovery should be limited to the income lost as a result of the destruction of ABM's office and storage space and supplies o A federal appellate court, however, ruled that ABM was entitled compensation for the loss of all its WTC operations o The court reasoned that the "policy's scope expressly includes real or personal property that the insured 'used,' 'controlled,' or 'intended for use.'" o Because ABM income depended on the common areas and leased premises in the WTC complex, it had insurable interest in that property at the time of the loss

• Example: Kiana is selling her home and lot to Jayden. Kiana has a one-year fire policy with Ajax Insurance Comp, with 6 months of coverage remaining at the date on which the sale is to close. Kiana agrees to assign the balance of her policy, but Ajax has NOT given its consent. One day after passage of the deed, a fire totally destroys the house. Can Jayden recover from Ajax?

o The answer is NO - as the policy is actually voided on the closing of the transaction and the deeding of the property o The reason the policy is voided is that Kiana no longer has an insurable interest at the time of loss, and Jayden has no rights in a nonassignable policy o Assignment ex.

The parties to an insurance policy are

o The insurer - the insurance company o The insured - the person covered by its provisions

HOMEOWNER'S INSURANCE

property coverage liability coverage

If a broker fails to procure the coverage the applicant sought,

the applicant has a claim against the broker, not the insurer.

• Disputes over insurance often focus on

the application of exclusions in the policy

The agent owes fiduciary duties to

the insurer (insurance comp.), but NOT to the person who is applying for insurance

• The court presumes that the policy is in effect

unless the company can show otherwise and an insurer must make sure that the insured is adequately notified of any change in coverage under an existing policy

Insurer's Duty to Pay or Defend: Once an insurer has issued a policy and assumed the covered risks, it must:

upon being notified of a claim, investigate and ascertain whether the insured has suffered a covered loss; and when a third party claims against an insured, (1) make reasonable efforts to settle the third party's claims; and, (2) if unable to settle, defend the insured, regardless of the merits of the third party's claims.

• Misstatements or misrepresentations can

void a policy, especially if the insurance company can show that it would not have extended insurance if it had known the facts

Universal Life

which is a hybrid of term and whole life. o From every payment, usually called a "contribution," the issuing life insurance company makes 2 deductions. ♣ The 1st is a charge for term insurance protection ♣ The 2nd is for company expenses and profit ♣ The funds that remain after these deductions earn interest for the policyholder at a rate determined by the company ♣ The interest earning amount is called the policy's cash value, but that term does NOT mean the same thing as it does for a universal life policy, the cash value grows at a variable interest rate rather than at a predetermined rate

Term

which provides coverage for a term of years in exchange for premiums paid during the term; o Payment on the policy is due only if death occurs within the term period (10-15yrs maybe) o Premiums are lower than for whole life or limited-pay life, and there's usually no cash surrender value o Frequently this type of insurance can be coverted to another type of life insurance

Whole Life

which, in return for premium payments made for the insured's entire remaining life, provides protection with a cumulated cash value that the insured can use as collateral for a loan during her life (lasts your whole life); o The beneficiary receives a fixed payment on the death of the insurance (it's sometimes referred to as: straight life, ordinary life, or cash-value insurance)

Primary concern in determining liability

• The existence of an insurable interest is a primary concern in determining liability

o A policy that a person takes out on his/her spouse:

♣ Remains valid even if they divorce ♣ Unless a specific provision in the policy calls for its termination on divorce

o If a firm insures a key person's life and that person leaves the firm and subsequently dies:

♣ The firm CAN collect on the insurance policy, provided that it has continued to pay the premiums