Insurance Law

What must usually happen in order to recover for bad-faith breach of contract in an insurance claim?

Liability for Bad-Faith Breach Silberg v. California Life Insurance Company - when the insurance company failed to pay the claimant's medical bills because there was a question whether the insured was covered by WC, the court found that the insurance company acted in bad faith because it could have paid the benefits then imposed a lien against the WC claim as a matter of subrogation? It was therefore not only liable to pay under the policy, but also for the physical and emotional distress proximately caused by its conduct, but punitive damages were not supported under the facts. The policy was ambiguous: it said that loss was not covered if covered by WC. So the mere payment of a settlement less than the plaintiff's total medical expenses was ambiguous and should be construed for the plaintiff. The defendant also had to pay for the damages that were a proximate result of nonpayment, which took place after the policy lapsed. It seems like the insurance company had some good arguments for no coverage. SO why did the court uphold the bad faith claim? "It was undisputed that the health insurance company could have paid the insurance bills, then had a lien against the WC benefits the insured was entitled to." So unlike other cases, here it was not about the argument for denying coverage, but rather that the insurer had an option to avoid liability but didn't take it for no good reason. Punitive damages might be allowable in the same jurisdiction and with the same facts in future cases, with this precedent established. Notes: - The cause of action is considered by some courts to be Contract in nature, as an implied covenant of good faith and fair dealing. This makes recovering emotional distress harder. You often need to prove an independent tort necessarily in order to get extra-contractual damages for breach, such as fraud or intentional infliction of emotional distress. - The dominant approach today is to hold that the cause of action exists in tort, but that an independent tort is not necessary to its existence. Rather the insurer commits a tort if its breach is in "bad faith." There is then a cause of action in tort for bad faith breach of contract, then tort rules for damages apply. The key issue then becomes what bad faith means. It could mean negligence + (gross neg, reckless disregard, coverage not fairly debatable, no legitimate basis on which to deny coverage, would there be a directed verdict for P - if so, bad faith, undue delay, ) - Mere negligence is not usually bad faith, nor when the insurer should have known the claim was covered, nor that it was careless in processing a claim. But negligence coupled with evidence that the insurer probably knew the claim was covered may constitute bad faith. - One specific test: "whether the denial of a claim is in bad faith is determined by whether it was 'fairly debatable' whether the claim was covered" - Merely unreasonable misinterpretation of the terms of a policy may not be enough to show bad faith - Punitive Damages - may be awarded in a bad faith claim when something more than bad faith, such as facts establishing that the defendant's conduct was aggravated, outrageous, malicious, or fraudulent; or if the defendant's conduct was "guided by an evil mind which either consciously sought to damage the insured or acted intentionally, knowing that its conduct was likely to cause significant damage to the insured." State Farm v. Grimes - court denied a directed verdict standard. No reasonable basis may be enough to award punitive damages. Evidence of bad faith may be enough to make punitive damages a jury issue.

How much broader than the duty to provide coverage is the duty to defend? How can an insurance company play it safe without promising coverage?

The duty to defend is generally broader than the duty to indemnify. How much, though? The duty is not stated very specifically in the policies, and the circumstances under which the question arises are varied. So, what is the scope of the duty? You may potentially have a duty to defend if: - Once you agree to defend unconditionally, you cannot deny coverage - If you refuse to defend, but had an obligation to, then you cannot now deny coverage - There is a claim for damages you would be liable for, which you successfully defend (bad claim) - Reservation of Rights - Eight or Four corners rule - Extrinsic facts that make insurer aware that the claim is covered - Duty to appeal? - most jurisdictions say yes - Tendering policy limit? - absolves duty Scope of the Duty to Defend Beckwith Machinery Company v. Travelers Indemnity - insured sold caterpillar scrapers to underlying tort suit plaintiff, who claimed they were defective, suing the insured and the manufacturer for the cost to fix the scrapers and the lost construction time (3.5 mil). The insurance company initially said it would defend the insured against all the negligence claims against it, except for claims for punitive damages. The insurer may have been unsure whether the claim was covered because the damage sounds more like a contractual one (business exclusion). After a great deal of confusion, the insurer then switched positions, saying it would neither cover the loss nor defend the insured. The insured sued. Rule: the insurer is contractually obligated to defend the insured whenever allegations against the insured state a claim which is potentially within the scope of the policy's coverage, even if such allegations are groundless, false, or fraudulent. The duty to defend is broader than the duty to indemnify. The duty persists until allegations against the insured are confined to claims are limited to recovery for damages not covered by the policy. If facts have yet to be established when the complaint is filed that will determine whether there is coverage, the insurer must defend until those facts are determined and the claim is narrowed to ones outside of coverage. Rule: If an insurer refuses to defend a claim which may be within the scope of the policy, the insurer's refusal at the outset is made at the peril of the insurer. Rule: When an insurer believes that a claim is not covered, it may protect itself by a reservation of rights under the policy which fairly informs the insured of its positions. It can then defend while still being able to deny coverage. Failure to reserve rights when defending estops the insurer from later denying coverage. In this case, the insurer assumed the defense without reserving rights as to indemnification. Therefore it cannot deny coverage. This was a failure to act in good faith and due care. Notes: - When the insurer receives notice of a suit against insured, it has four options: 1. Refuse to defend - youre in trouble if the complaint alleges facts that may fall within coverage and which turn out to be true, or when the insurer is aware of facts that make the claim fall within coverage; the test is whether there "definitely" would be coverage if the alleged facts were true. The majority rule is that an insurer that breaches its duty to defend is estopped from denying coverage. 2. Defend unconditionally - at least now you don't have to pay for independent counsel to avoid conflict of interest - a reservation of rights letter creates a conflict of interest, and you'll at least need to waive the right to independent counsel 3. Defend subject to reservation of right to contest coverage if the suit is not defeated 4. Bring declaratory judgment action seeking a ruling that it has no duty to defend or indemnify - an insurer is able to withdraw once it is clear that there is no duty or no longer a duty, to defend. If the facts alleged are within coverage, the duty persists until the claim is confined to recovery the policy does not cover.

How do insurers deal with moral hazard and adverse selection?

These threats are combatted by things like "underwriting" - the process of screening and evaluating the applications to determine the degree of risk posed by prospective insureds; they classify insureds based on degree of risk posed and set premium levels accordingly - Asking questions to determine what the appropriate risk allocation should be, so that the company can charge above the expected value of the risk - Screening out high risk applicants - Experience rate when policy is renewed - Deductibles, co-insurance, co-pays

How do "Other Insurance" clauses interact with each other?

"Other Insurance" Clauses Carriers v. American - other insurance clauses - there are three kinds of "other insurance" clauses: "pro-rata" clauses, which limits the liability of an insurer to a proportion of the total loss, "escape" clauses, which seeks to avoid all liability, and "excess" clauses, which limit insurance to excess losses. The provisions can be enforced as written so long as only one of the policies contains such a clause but it gets tricky when two do. In this case, both policies had an "excess" clause. There are several tests to determine which carrier is the primary insurer in such a situation: - The insurer covering the tortfeasors - The prior insurer in time - The insurer of the vehicle's owner - Whose policy covered the particular loss more specifically - Whose other insurance clause is written in more general terms Instead, the court adopted the majority rule: where both contracts contain an excess clause, both are treated as primary. Next, the court has to decide how to prorate the loss. There are three rules for when the loss is under the policy limit of either policy: - Majority Rule: prorate according to the limits - Prorate according to premiums paid - Prorate equally up to the policy limit The court took the split-the baby approach and prorated equally. Notes: Kinds of "Other Insurance" Clauses - Pro-rata - limits insurer to proportion of the total loss - Escape - Avoid all liability - Excess - limit to excess losses If an insured has three policies, two of which are pro-rata, and one of which is escape or excess, all three policies are enforceable. For particular one on one matchups, need to go back and look at the slides.

What are the different kind of life insurance binders?

- Approval Binder - you have coverage at the time of submitting your application if your application is approved (misleading..) - Conditional Binder - "Coverage exists as of the date of application if we are assured of insurability" - you are insured when you have a completed application and passed a medical exam - Unconditional Binder - you are covered at the time of application Guant v. ____ - conditional binder - plaintiff decedent guant died after passing the medical exam and applies and pays premium, but before the home office formally approved his application. After he died, they formally did not approve. The problem in this case is the impression a policyholder to be gets when he is issued a binder. When you pay a premium and are handed a binder, you have the impression you are covered immediately. The judge in this case called the policy procedurally unconscionable because it suggested you were getting something when you really weren't. you can avoid these types of problems as an insurer by not issuing binders.

What are risk transfer, risk pooling, and risk allocation?

- Risk Transfer - the risk averse party transfers the risk to the insurer for an amount that is a little more than the expected value of the risk. The insurer can afford to take on the risk because with a large enough risk pool the variance on the expected value decreases. • If there is a 1% chance of suffering a 10000 or a 10% chance of suffering a 1000 loss, if you are truly risk neutral, then each risk is equal. A risk AVERSE person, though, would be more likely to transfer the 10000 risk because he cannot cover it, and be willing to pay more than the expected value. - Risk Pooling - this is what enables insurance companies to transfer risk onto themselves. • The larger the number, the better. This also helps with the fact that it may cost 110 to transfer a 100 expected value risk to a company. - Risk Allocation - insurance companies can allocate the risk to more risky parties by assigning higher premiums to those parties. Insurance companies want to know how risky you are so that your premium will correlate to your risk so that you don't pay too much and leave, or pay too little and put them out of business. • Do you smoke? Do you travel? Do you scuba?

What is adverse selection?

Adverse Selection - if potential policyholders know better than insurers whether they pose comparatively high or low risk, then adverse selection may occur: when insurers charge each party the same price for coverage, then high risk parties elect to be insured in greater proportion than low risk parties, and thus insurers must raise the price of coverage. This causes low risk insured people to have higher rates and they start deciding not to be insured, thus causing the insurers to raise prices again, repeating the cycle.

Property Insurance: by what exclusion can an insured void his own coverage through his actions?

As general rules, homeowners policies usually cover damage caused by the policyholder's own negligence. However, this comes with two exceptions: one, you are not covered for intentional damage to your home, and two, you have a duty to mitigate, so that if you accidentally set your house on fire, then when you find out, simply watch it burn, you won't likely be covered for the damage caused after you discovered the fire that you could have mitigated. Dynasty v. Princeton Insurance - the defendant insurer insured Dyansty's building. That building burned down. Evidence tended to show arson. The sprinkler system had been shut off by someone. The insurer wanted a jury instruction based on its Increase of Hazard clause, which said that there would be no coverage where the hazard is increased by any means within the control or knowledge of the insured. The court held that an insured's unjustifiable disabling of a sprinkler system was an increase of hazard. An increase in hazard, such as turning off a sprinkler system, is different than intentionally burning the building down. So to list both theories to the jury would not be duplicative. In this case, it was important to instruct the jury to both theories, as there may not have been enough evidence to show arson, but possibly enough to show Increase of Hazard. Notes: - Many states don't allow such a clause - To get around that, some policies have specific increased risk exclusions, such as denying coverage where the property has been abandoned for a long time, damage that would have been avoided if the property was not vacant, and so on. - Courts also limit this clause by • Requiring knowledge AND control • Narrowly construing who the insured is • Or by requiring the increase in hazard to be substantial in time and/or magnitude

Can you change the beneficiary of or assign a life insurance policy?

Change of Beneficiary and Assignment Englemen v. Conn General Life Ins - "substantial compliance" rule - the insurance company's position as interpleader was that hey, we don't care who we have to pay, we just don't want to pay twice. The policy owner/QCV first went to the agent, then wrote a letter, on more than one occasion saying she wanted her estate, rather than her nephew, to be her beneficiary. The insurer sent a change of beneficiary form, which was never returned. Its own policy requirement was that a change of beneficiary request was only complete when a "satisfactory" change of beneficiary form is filled out and received by the insurer. The estate's position was that she did everything in her power to change her beneficiary. The court then did what a majority of jurisdictions have done, which is adopt the majority rule: Substantial Compliance - Where the owner clearly intended to change the beneficiary, and took substantial affirmative action to effectuate the change, then the owner has changed the beneficiary. Grigsby v. Russell - there is a difference between transferring ownership of a policy, which comes with rights and obligations, and assignment of the right to proceeds from the policy. - Transferee - right to proceeds, right to borrow against value, right to change beneficiary, obligation to pay proceeds, and so on - Assignee - right to proceeds (superior to transferee's rights) In this case it was ruled that Russell could legally assign the right to the proceeds from his policy to his doctor as consideration in a contract. The court was not persuaded that this was a wager. It certainly was not a wager when he first bought it. Note: What if you took out the policy with the intent to immediately turn around and assign the right to collect to someone who has no insurable interest in your life? This looks like a wager and should not be valid. Some states have even drafted legislation to stop this type of activity. Note: usually, changing the beneficiary only requires substantial compliance. Courts are split. One major exception is a divorce decree. While divorce itself does not change the beneficiary, a divorce decree does, even if it does not substantially comply.

Property Insurance: what is the intrinsic loss exclusion and when can it apply to void coverage?

Chute v. North River Insurance - The insurer is not liable for losses or deterioration which arises only from decay or corruption inherent in the subject insured, or, "proper vice," ie, fruit going bad, wine turning sour - things that result from internal decomposition rather than external damage. Therefore, the plaintiff was not allowed to recover on a cracked opal that cracked not from external forces, but from an inherent defect. Insurers are not liable for property destroyed by the effects of its own inherent deficiencies or tendencies. Why? Insured losses must be caused by external fortuitous loss. Adverse selection and moral hazard: people with low quality property would be more likely to insure and less likely to take care of it. Ultimately, if your product is shitty, you should go after whoever sold it to you. Notes: - Intrinsic loss is not covered because it is not fortuitous. Insurance is meant to transfer risks, not sure things. - Wording often includes "wear and tear, inherent vice, latent defect, mechanical breakdown" Rosen v. State Farm General - the clear and unambiguous language of the contract said that only actual collapse was covered (ie, the structure had fallen down, or fallen to pieces). Therefore, it was error for the lower court to construe the contract to provide coverage for imminent collapse as a matter of policy. The lower court said there was coverage as a matter of public policy (reasonable expectations?). The contract was clear and unambiguous but the lower court said there was coverage anyway. In some sense this was a ruling about ambiguity but in another it was a case about what kind of loss is covered. Notes: - There is a split on collapse coverage. Sometimes it turns on the language, like in Rosen, but other courts like the COA in this case hold that imminent collapse is covered because otherwise the plaintiff would have an incentive to let the building collapse. If the policy had said something like the case the COA based their opinion on, such as "we exclude coverage for collapse except for loss of damage caused by or resulting from risks of direct physical loss involving collapse of any building..." - here there is ambiguous language that could support a reading that the building is covered for imminent collapse. - Some policies cover for collapse but only when it is caused by certain things, like termites - A "sue and labor" clause is a clause in the insurance contract which protects the insured from the costs of fixing problems that would have been covered if they had gone undetected and been insured. This runs back into the intrinsic loss doctrine.

What is coinsurance?

Coinsurance An insurance company will often penalize you for underinsuring your property. For example, the sample policy gives you a lower recovery if you insure your property for less than 80% of the property value. The reason is that otherwise you would probably insure your home for less than its full value, lowering your premium and giving you more bang for your buck. So, you may consciously decide to underinsure. So the coinsurance provision appears in property policies and says that if you underinsure (p 207 under Loss Settlement), then the insurance company will pay you less: either actual cash value, or the proportion of the cost to repair or replace which the policy total bears to 80% of the replacement cost. So, if you underinsured, causing a penalty of coinsurance at 80%, times the cost to repair or replace, 200 = 160. That's the denominator. Then the numerator is the amount of coverage. 80/160 = ½. You will always get the higher of either actual value or the coinsurance amount.

What's the difference between "collision" and "comprehensive" coverage and how do they interact?

Collision and Comprehensive Coverage Collision covers damage due to collision as a form of first-party insurance (sample policy 691: "Collision" means the upset of your covered auto or a non-owned auto or their impact with another vehicle or object), but contains many exclusions for things like (page 691: falling objects, fire, theft, explosion, windstorm, hail, vandalism, riot, animals, breakage of glass), while comprehensive covers many of those excluded things. There seems to be some overlap between the two. Roth v. Amica - the insurer did not breach its contract by not paying for the diminution in value for damaged vehicles, nor did it breach its contract by specifying parts for replacement that were not what the original manufacturer used. Allison v. Iowa Mutual - the insured had comprehensive but not collision coverage, and the insured's car was damaged when it was on a bridge that collapsed. Collision is usually a sudden impact between two objects, but contact with the road is not usually thought of as collision. The court decided the bridge collapse was not a collision under the normal or policy meaning, noting that collision usually involves the use of the vehicle and decisions made by the driver being involved in the causal connection to the collision, whereas here, nothing the driver or the car did set the crash in motion. Tests to distinguish collision from comprehensive: 1. "collision" is defined as it is in ordinary usage 2. Was the vehicle being operated? 3. Was the loss caused by an operational risk? If so, collision. If not, comprehensive. 4. Were the operation of the vehicle and the vehicle's momentum substantial contributing causes? Rodemich v. State Farm - the insured had comprehensive coverage but not collision coverage. He swerved to avoid hitting a wolf or some animal and went off the road and hit a tree. The question was whether he hit the animal or almost hit it and whether almost hitting it would fall within comprehensive coverage. When an insured risk operates to subject the insured property to a risk not insured against, the loss is covered. But in this case, it was a fact issue whether the plaintiff's camper actually hit an animal before crashing or missed the animal entirely. In the former situation, there would have been coverage because hitting an animal is excluded from collision and is therefore comprehensive, but rolling over in a ditch is a collision. So the case had to be remanded for a jury to decide whether the camper hit the animal.

What is an "ambiguity" and how does the court deal with them?

Did "Warranted that the third floor is occupied as Janitor's residence" mean that ONLY a janitor would live there? The appeals court decided that this provision meant only that at LEAST a janitor lived there, not JUST a janitor lived there. Rule: ambiguity as a question is determined as a question of law - the ambiguity must, if it exists, be construed AGAINST THE INSURER, in a way in favor of coverage. Rule: a provision is ambiguous if reasonably intelligent people would honestly differ as to its meaning. The court need not use the "Four corners" method of determining whether ambiguity exists, but may consider external evidence. The court may also consider whether more precise language would avert the problem. So, if there are multiple reasonable interpretations, the court will select the on in favor of coverage.

What authority does an insurance agent have to do things like bind coverage?

Different kinds of agents have different levels of authority to bind insurance companies (ie the binder in the WTC case). General Agents can bind the company except with life insurance, but soliciting and local agents do not. Elmer Tallant Agency v. Bailey Wood Products - Zurich tried to deny coverage to the plaintiff based on the argument that its contract with Tallant, the insurance agency, put limitations on Tallant's authority to bind Zurich which the agent ignored when assigning the risk under the policy to Zurich. Further, Zurich never received money from Bailey, and Bailey did not even know Zurich was his assigned insurer, only that Tallant had told Bailey it was insured, and unbeknownst to Bailey Tallant had chosen Zurich. - Rule: An oral contract of insurance between a general agent and a third party is binding on the insurance company. Undisclosed, private limitations upon the authority of a general agent do not bind the third party who is unaware of them and contracts with the agent within the scope of the agent's apparent authority. - Rule: even where there is no agreement between applicant and agent as to the company in which the risk is placed, where the agent has actual or apparent authority and designates the company by some positive act prior to loss, the company can be held liable. - Rule: A company can give an agent actual authority to bind without restriction, which, if it were the case, would solve this case without question because the company would be bound since Tallant said it was bound. In this case, though, he did not have that actual authority but was instead acting on apparent authority. - Rule: Authority can be express or implied. In another case where the agent's authority was limited in writing, like here, the company routinely over time allowed the agent to bind and backdated coverage to the date of binding, establishing implied authority. Unlike there, here there was no evidence of a course of dealing establishing implied authority. So Tallant did not have actual authority. - Rule: In the absence of actual authority, Bailey can show Tallant had apparent authority by showing he was "cloaked" with authority - so any limited authority at all gives the agent apparent authority to bind coverage. Here, Tallant was acting in reliance on Tallant's representations. Therefore, Zurich is liable by virtue of the fact that it selected Tallant as its general agent with apparent authority to make it liable. It must go after Tallant if it doesn't like what Tallant did. Because Tallant exceeded its actual authority to bind Zurich by insuring risks that Zurich required prior approval on, he was acting within his apparent authority only, and the loss to Zurich is indemnifiable by Tallant. Notes: - The claim against Tallant by Bailey if Tallant had said it procured coverage when it had not assigned an insurer, would be one for negligent failure to procure or breach of contract - Suppose an agent sells a family a hurricane policy which covers everything except flood damages, and the agent says they don't need that because they are not on a flood plane. Then Katrina happens. Nationwide denies their claim. They say the agent told them they were covered for everything that would result from a hurricane. He had apparent authority. Lots of courts have said you still have an obligation to read your policy and know that your agent cannot alter the terms of the contract, especially if there is a clear exclusion, say, for floor, or a clause making clear that agents cannot alter the terms. A separate issue is the agent's duty when it comes to advising you on what coverage you need. Jurisdictions are split on whether an agent has an affirmative duty to advise. But once you do offer advice, you have a duty to make that advice reasonable. (negligence)

Property Insurance: what is business interruption coverage and when is it triggered?

Duane Reade v. St. Paul - Duane had a store in the WTC before it went down, and had interruption of business coverage. When the building went down, there was a dispute as to what extent Duane was covered for lost business. She said she was covered for all business lost until the WTC and her store were rebuilt. St. Paul said she was covered until her profits reached normal levels or not at all. The Court said neither interpretation was tenable, and, reading the plain language of the policy, said that the coverage applied to the hypothetical time it would take to rebuild her store and resume business, not rebuild the WTC. Another issue was a loss of market exclusion, and St. Paul contended that the WTC was the market. The court found no merit here, saying that this provision envisioned market changes, demand changes, and so on. Notes: - Business Interruption Coverage usually applies when there is: 1. Damage to Covered Property, 2. Caused by a Covered Peril, 3. Resulting in a Necessary Interruption of business, 4. Resulting in a Covered Loss 5. Which occurs during a covered Restoration period. - All elements usually must be met for coverage to trigger. - "Contingent Business Interruption" insurance is insurance for loss of business caused by the destruction of other businesses which your business is dependent on, ie, if the Janitor got insurance at the WTC for all the businesses in the building which he cleaned. - You recover lost net profit, as well as any continued expenses (such as rent, but not inventory) - 2nd Circuit: the Restoration Period equals a period it would take insured to rebuild/replace its WTC store at a reasonably equivalent location. - The Extended Recovery Period ends when "functionally equivalent operations" are resumed at the store. - Loss of Market Exclusion - usually only applies to demand shifts and economic changes.

What is the "expected or intended harm" exclusion in liability insurance?

Expected or Intended Harm Sample CGL policy page 466, 467: "Insurance does not apply to expected or intended injury from the standpoint of the insured, but not from self defense" Homeowners Policy: page 210, liability section, "suit for bodily or property damage," 211, "but not for expected or intended injury from the pov of the insured". Stonewall Insurance v. Asbestos Claims Management - some plaintiffs are suing for exposure, others are suing for property damage (asbestos damaged their home or made it dangerous?). The insurance company argued that the damage should have been expected or intended. The fact finders rejected this argument. To fall within this exception, the insured must expect or intend the harm at the time that it caused the damage, and, the insured must actually intend or expect the harm, (subjectively) not merely should have intended or expected the harm (objectively). The burden of proof for an exclusion falls on the insurance company. What does expected mean? - Foreseeable? - Likely to Occur - Majority: insured was subjectively aware that the damage was substantially certain to occur Known Loss Rule: an insured may not obtain insurance to cover a loss that is known before the policy takes effect. Courts are split on what is required knowledge. You will at least have to transfer some risk. This could mean knowing that some losses will occur but not how many. Maybe that there is possible suit but not guaranteed to award damages. Notes: - Should an employer be excepted from coverage where the negligent act was performed by a low-level employee who expected the harm, and now the employer is vicariously liable? Looking at the cgl policy, the required knowledge is on behalf of the insured, but the employee is one of the insured Next: what does Intended mean? 540-564, timber case on reading list Uniguard v. Argonot - the insureds, parents and a child, were being sued for the child's burning down the school building. The court ruled that the boy's burning down of the school was not an "accident" and that there was sufficient evidence to show it was intentional. Therefore, he was not covered. The parents, however, sued on the grounds of negligence, were covered. Note: Insurance companies often move for declaratory judgment on their duty to defend because if they simply choose not to defend, when the insured loses the law suit he may be able to sue not only for the damages, but also for bad faith. Rule: "accident" is not ambiguous, at least not to the extent that a boy lighting a fire which he possibly did not intend to burn the whole school down might become an accident because it did in fact burn the school down. The means as well as the result must be unforeseen for an accident. Rule: For "intent" to apply, courts are split on whether "specific intent" towards the resultant damage is required in order for the intended or expected loss exclusion to apply. Some courts require intentional conduct with foreseeable results, while others require conduct plus intent to cause some damage/ or injury of same general type or severity, and still others require conduct plus intent to cause the exact damage that occurs. But the court did not reach this question because it was clear from the record that the trial court could find the boy intended or expected the resultant damage. Rule: insureds, when there are several, are treated separately, the exclusion of one does not exclude the others when they did not participate. Note: "accident" may not actually add anything to the expected and intended language, otherwise, a restaurant liable for negligently serving bad food might be excluded for intentionally serving the food. So it seems like the results should be what was unexpected, and some cases hold that way or seem to. Powe Timber v. Acceptance Ins - Mississippi company manufactures flooring that has been treated with dangerous flooring, which produces wood chips, which were also distributed. Plaintiffs were harmed when they burned or handled the chips they were exposed to chemicals. Mississippi ruled that for an accident to occur, both the means and result must be unintentional. Other states don't go this far: only the result need be unintended unless the outcome is "highly probable" Lambert v. _____ - guy thinks someone stole from his house so he goes inside and grabs his pistol and tries to shoot out the tires, but it ricochets and kills the victim. The court believed that he did not intent to kill the victim, but said the shooting was not an accident. ???

In life insurance, what is an "incontestability clause"?

Incontestability Amex Life v. Superior Court - incontestability statutes, now required by law, provide that after paying premiums for two years and surviving, an insurance company may no longer contest the validity of the coverage based on fraud or misrepresentations by the insured. Amex argued that there should be an exception where the insurance company requires a health inspection and someone besides the insured shows up and takes the test, because fraud at this level amounts to a failure of a meeting of the minds, therefore no contract was ever formed and the agreement for life insurance is void "ab initio". In this case, the court rejected the imposter defense, but it seems like they may not have had the fraud been harder to discover. Even minimal efforts would have allowed Amex to discover the decedent's obvious fraud: the guy he sent in his place did not look like him, weighed a lot differently, and was not even required to show ID. Note: many courts allow the imposter defense, as well as the legislature of the state where this case was decided, ruling that where the person who signs and takes the blood test and fill out the application and so on, the contract is void from the beginning (no meeting of the minds ab initio), so there is no incontestability clause to rely on

Life Insurance: what is the requirement of an insurable interest?

Insurable Interest You have to have an insurable interest in someone to take out life insurance on someone: usually a spouse or child, or a business partner, or a debtor. The farther you get from here, the harder it is to prove, ie, grandparent. Or a divorced spouse. And so on. You must have the insurable interest at the time of policy formation. If the owner is the CQV (person who lives), owner has an insurable interest automatically, and the beneficiary needs no insurable interest. If the owner is not the CQV, both the owner and beneficiary need an insurable interest. Ryan v. Tickle - estate claimed that Tickle had no insurable interest, and alternatively, that it was a wager because the proceeds exceeded the Ryan's (the decedent) interest in the funeral home. - The insurable interest must exist only at the time of the formation of the policy for the benefits to be paid - The majority rule is that only the insurance company can raise the issue of lack of insurable interest So the estate was not allowed to raise the issue of insurable interest. Notes: - "Wagers" are not allowed. This issue would have been important had the plaintiff had standing to raise the issue. There is a wager if two people who are in business "together" but have insurance policies on each other for a huge amount of insurance, basically to see who lives longer and collects the money. IF the insurance policy is not tied to your monetary loss, but rather a wager on who will live longer, then the policyholders had no insurable interest and the policy would be void. - You must have an insurable interest at the time of contract formation.

Property Insurance: how do insurance companies calculate recovery for loss?

Insurance policies will have wording designed to keep the policyholder from recovering to his advantage. The loss shall not be less than the recovery. Zochert v. National Farmers Union - the parties disagreed over whether it was proper for the insurance company to calculate the value of two destroyed silos by subtracting the depreciation from their value. Allowing an insured to recover the original value of real estate that has depreciated would violate the principle of indemnity by providing a windfall to the insured. There are at least three ways to measure "actual cash" value: 1. Market Value 2. Replacement cost less depreciation 3. The now majority test: broad evidence rule, which permits consideration of all evidence an expert would find relevant to a determination of value. Clearly, the cost of repairing without depreciation is not the actual value of the loss. Plus, the policy had two provisions, one of which said "in this case, you get the cost to repair not minus the cost to replace," and in another place, "actual cash value." For both to mean something, actual cash value could not mean cost to repair without deducting cost to replace. Notes: - Views on indemnity: one view is that the purpose is to assure that the insureds net worth before and after the loss are the same. (economic conception) Another view is that the purpose is to return the insured to roughly the same style of life as he or she occupied before loss. - Expressly wording a policy to say that replacement cost coverage is the measure can eliminate this as an issue - Many policies require that actual cash value be the value unless actual replacement is shown - Some states sidestep the issue with Valued Policy statutes, which state that the measure of recovery is the face amount of the policy when the property is completely destroyed

Whats the difference between an agent and a broker?

Intermediaries come in two main types: agents and brokers. Agents are the representatives of the company, making them functionally dual agents, representing either the insurer or policy holder depending on the function. Agents are either independent or exclusive. Independent agents are not employees of any one company. Exclusive agents are limited to just one. Agents function as claims processors and receive commissions from insurers based on premiums. A broker's main function is to obtain coverage for the policyholder. Brokers are chiefly an agent of the policyholder but receive commissions too, and have authority to issue endorsements and to process claims, but have less authority than agents. This results in a slight conflict of interests. Brokers are usually used in more sophisticated contracts for insurance, though.

What happens when a life insurance policy covers accident but not disease, and there is a question as to which caused the death of insured?

Limitations of Risk Silverstein v. Metropolitan Life - the egg shell doctrine? The policy covered death "caused directly and independently of all other causes by accidental means." But did not cover "death...caused wholly or partly by disease or bodily or mental infirmity or medical or surgical treatment". So in this case, the question was whether a benign stomach ulcer which was irritated when the decedent tripped and caused a can to fall and hit his stomach, causing the ulcer to rupture his stomach. The ulcer never would have caused him injury on its own. So, was his death caused purely by accident, or in part by "disease"? In regard as to whether a "condition" was excepted from a life insurance policy, the court said "If there is no active disease, but merely a frail general condition, so that powers of resistance are easily overcome, or merely a tendency to disease which is started up and made operative, whereby death results, then there may be recovery even though the accident would not have caused that effect upon healthier people in a normal state." In the face such clauses, some courts will look for a dominant cause, much like in the property cases. In such cases, they are ignoring the policy and honors the reasonable expectations of the consumer.

Can you lose your right to recover as a beneficiary on a life insurance policy?

Limitations on Recovery by Beneficiary State Mutual Life v. Hampton - the state statute said that no one convicted of murder, or who takes the life of the insured, could take from the policy as a beneficiary - just because the wife was acquitted on first degree murder charges, this did not automatically get rid of the slayer statute issue (her position was that by res judicata the issue was already litigated). The common law did not require a conviction, only that by a preponderance of the evidence it could be shown that the beneficiary killed the insured. She would still not be permitted to recover his life insurance policy in civil court if it could be shown by a preponderance of the evidence that she killed her husband. The burden of proof is much different in civil court. Another difference is that interested parties (the other beneficiaries) were not parties to the criminal case. Notes: - What constitutes killing? Negligence? Usually gross negligence or recklessness is required. Obviously intent is enough.

How can a limited interest affect your right to recover as a property insurance holder?

Limited Interests Mortgages If you mortgage your house with a bank, you will be required to get insurance, which will require you to name the bank as the mortgagee, so that if the house burns down, the bank gets paid. The way this typically works is, if the insured's house burns down, the insurer will pay the bank up to the limit of liability or the bank's interest. If the insurer pays off the mortgage, insured's debt to the bank is cancelled. This is usually enforceable even if the insured violated the policy. Northwest Farm v. Althauser - the insured materially misrepresented to the insurer, voiding coverage. The policy required the insurer to pay the mortgagee regardless. So the insurer paid the mortagee. The insured argued that it was thus relieved of its debt. This would give the policyholder an unjust windfall. Instead, the insurer was subrogated to the mortgagee's right to enforce and foreclosure on the mortgage. It was as if the insurer became the morgagee and gained all its rights against the insured. This kept the policyholder from benefitting from the policy which the insurer still had to perform certain duties under.

Does an insured have a duty to disclose to the insurer?

MacKenzie v. Prudential Ins. Co. of America - applicant signed his application with answers to questions about blood pressure, whether and what treatment he sought for it up until that time. He answered truthfully. The application said no coverage would attach if his answers were not true up until the time the policy was delivered. Before it was delivered, the applicant sought treatment for high blood pressure. Rule: a misrepresentation must be either material to the risk or fraudulently made Since the risk was material to the life insurance policy, the insurance company was entitled to win. Note: this case seems to establish at least a situational duty to disclose. The insured's answer was truthful at the time of application. But there was a period of time while the application was pending where the insured found out he had high blood pressure. He said nothing. Then he files a claim. The insurance company denies the claim. They say he has a duty to correct his application because the application said that the answers had to be true at the time the policy was issued. In tort, you have a duty to disclose information if you find out something was false and material. Courts have in some cases distinguished between a duty to disclose new conditions and worsening conditions. Insurance companies worry about adverse selection and the moral hazard in this type of situation where people apply for insurance then immediately go to the doctor. (Concealment is different than misrepresentation. The insurer must prove a failure to disclose a material fact that the insured knew was material. (a "scienter" element is added) an insurer may show scienter by showing that it asked the insured about the fact - taking the issue above the level of misrepresentation and showing the insured actively hid the truth) So you have affirmative misrepresentation, failure to disclose, concealment, and agent misstatements/failure to read issues.

When are services "Medically Necessary"?

Medically "Necessary" Services Fuja v. Benefit Trust - the plaintiff was a breast cancer patient. Chemotherapy had failed and cancer had spread to her lungs. Her doctor recommended, due in part to the fact that chemo would have a negligible chance of curing her, that she undergo a radical two step procedure, where some of her bone marrow would be taken out, while she had high doses of chemo, then put back in, to save her from the toxicity. The insurer denied coverage for the operation because it did not meet the policy standard for medically necessary treatment. The policy required all five criteria for "medically necessary" to be fulfilled: 1. Required and appropriate for care of the Sickness or Injury 2. Given in accordance with generally accepted principles of medical practice in the US at the time furnished 3. Approved for reimbursement by the Health Care Financing Administration 4. Not deemed experimental, educational, or investigational in nature by any appropriate technological assessment body established by any state or federal government 5. Not furnished in connection with medical or other research In this case, "in connection with medical research" was ruled unambiguous - there was clearly medical research going on at the time concerning the treatment, which was not yet widely used or accepted/proven, and decisively her doctor testify was part of a medical study. Notes: many courts made the opposite finding as the Fuja court, agreeing with the trial court that the operation is covered. A cutting edge or experimental type of treatment fares a better chance than a gender reassignment surgery. - Who decides whether a procedure is medically necessary has a big impact on coverage - ERISA? - Preadmission Review

Is there a duty to defend in some situations where the insured is being sued for something outside of coverage?

Mixed Claims and Conflicts of Interest Gray v. Zurich Insurance - when the insurer denied coverage on a personal liability policy where the claim against the insured was for assault, based on the theory that the claim fell squarely out of coverage due to an exclusion for intentional torts, the court ruled that the insurer DID have a duty to defend, because the duty to defend was a primary duty and the exclusionary clause was ambiguous, giving the insured the reasonable expectation of coverage. The suit carried the potential for liability within coverage: the insured was sued for intentional assault, but this could have resulted in liability for negligence. To limit coverage strictly to the language of the third-party complaint would make the third party the decider of coverage. The duty is dependent on the FACTS the insurer learns of through the complaint, the insured, and other sources. If those facts potentially lead to liability for which there is coverage, the duty attaches. Even if the insured goes on to lose the case and pays damages for an intentional tort, he may still go after the insurer for its failure to defend. To do otherwise would defeat the purpose of insurance. When an insurer wrongfully denies its duty to defend, it is estopped from denying coverage, therefore, in this case, the insurer had to pay damages for intentional torts, which were excluded from coverage. Notes: - Minority rule: the insured is not required to defend in two situations: one - if there is a conflict of interest in which the case may be defended by the insurer in a manner that would prejudice the insured's later coverage claim against the insurer, then the insurer may not defend; and two - if the trial of the liability claim against the insured will leave the question of coverage unresolved, the insurer need not defend (That question will later be resolved in the coverage suit, and the insurer pays defense costs only if it turns out that there was coverage of the liability action) - The insured under the Gray rule may still seek independent counsel if he thinks defense by the insurer may prejudice his case - Some courts may require, under a theory of reasonable expectation, if there is a self-defense clause you may be required to defend an intentional tort case if you are going to raise self-defense - The court suggested that you would be able to relitigate the issue of intentionality on the separate coverage case, eliminating the issue of conflict of interest.

What is moral hazard?

Moral Hazard - the risk that an insured or insurance beneficiary would deliberately destroy the subject matter that was insured in order to obtain payment of an insurance benefit. Nowadays it means generally the tendency of any insured party to exercise less care to avoid an insured loss than would be exercised if the loss were not insured.

What duties does an insurer have in regards to settling a claim against you?

Most policies seem to give the insurer the privilege to settle or not, how it so chooses, without any obligation to consult the insured. (CGL policy Section I-Coverages: "We may investigate and settle any claim or suit at our discretion." Implying the insured has no say) But courts have said otherwise. Crisci v. Security Insurance of Newhaven - there is an implied covenant of good faith and fair dealing in all contracts, including insurance. This implies several settlement duties, regardless of the contract: - The insurer is required to settle in an appropriate case although the express terms of the policy do not impose the duty. - To determine whether to settle the insurer must give the interests of the insured at least as much consideration as its own. - When there is great risk of a recovery beyond the policy limits so that the most reasonable manner of disposing of the claim is a settlement which can be made within those limits, a consideration in good faith of the insured's interest requires the insurer to settle the claim. - The test for whether an insurer has given consideration to the interests of the insured is whether a prudent insurer without policy limits would have accepted the settlement offer. In this case, the insurer did not settle when it knew the insured may very well be liable for upwards of 100k, but did not settle for the policy limit of 10k, resulting in an excess judgment of 90k against the plaintiff. The court found that the carrier was liable for the excess judgment as a result of its breach of duty to settle as a reasonable carrier. The insurer should, since it stands to benefit from not settling, also stand to lose from not settling. It was making a bet on behalf of the insured. 91k was awarded to Crisci. The court also held that the insured may recover for mental distress and awarded 25k for mental suffering. Notes: - Reasonable Offer Test - the case stands for the majority test. But some jurisdictions have higher standards of fault than negligence or even bad faith. Under the reasonable offer test, the question is whether an insurer under a policy without limits would accept the offer. - Strict Liability for Excess Judgments? - only one court has adopted "prima facie strict liability" where the insurer is liable for failure to settle unless it proves that the failure was based on reasonable and substantial grounds. - Measure of Damages: This case is in a minority allowing recovery of noneconomic damages for failure to settle. - Some courts have held an insurer may take doubts about coverage into consideration when deciding whether to settle, in effect adopting a subjective bad-faith rule. - There might be an implied duty to reimburse the insured for a reasonable settlement. - Sometimes, the plaintiff makes an agreement with the insured for a deal where the plaintiff gives up his right to go after the insured for the excess judgment, and gets his right to sue the insurer. These have been held valid so long as there is no absolute release of liability. - If two insureds are sued, the insurer may often settle for one, reducing the policy limits available to the other. But other courts disagree.

can you sue a life insurer for negligently failing to issue a policy?

Negligence Actions Against the Insurer Mauroner v. Mass. Life - when defendant insurance company took over 90 days to issue a policy to the plaintiffs, and it normally took it about 28-56 days, this delay constituted negligence, since an insurance company has a duty to act on applications within a reasonable time. As a result, the policy was issued later than it would have otherwise been. The QVC committed suicide two weeks before the two year suicide clause expired and the insurer denied coverage. Therefore, the court ruled that this damage was caused by the defendant's negligence and awarded the policy limit to the plaintiffs.

What happens if the insured does not read his insurance policy and there is something in the policy that the agent did not tell him about or told him differently about?

Neill v. Nationwide Mutual Fire Insurance Company - neill's house burned down. He had fire insurance. His application said "Past losses: none." But he had suffered fire damage three times before. The Ins. Co. filed for summary judgment and to have the contract struck down on the grounds that he made a material misrepresentation. They won their motion. Neill testified that he answered all the questions truthfully and that if there was a mistake on his application, it was not because of him. But, he did testify that he did not read the contract before signing. Rule: You have a duty to read and know what is in a contract you sign Rule: Where the applicant doesn't lie (speaks truthfully), but by fraud, negligence, or mistake, the insurer or insurer's agent misstates (with actual or apparent authority) the information on the application/contract, the insurer cannot rely on something it knows is false and escape liability through a theory of material misrepresentation. So the case presented a fact question as to whether it was Neill who was lying or the insurance company's mistake that led to the error on the application, which should be resolved by a jury. Fact question! You have to go to trial to decide which of them is telling the truth. The ins. Co.'s statement that the insured signed a contract saying he had no prior damage evinces that he said there was no prior damage. Which is a contrary factual allegation to the insured's.

How can failure to cooperate with the law suit or failure to give notice of an accident void auto insurance?

Notice And Cooperation Conditions All auto policies require the insured to give notice of suit and cooperate with the litigation and defense. State Farm v. Davies - when the insured breaches his duty to cooperate, the question is whether the insurer was prejudiced in its defense in an action for damages - the insured was sued and gave notice, but failed to appear for trial, the court addressed the burden of proof: the insurer need not prove that had the insured cooperated, they would have won at trial, (a "But-For" Test) neither a "per se" rule as the insurer wanted (where not showing up always prejudices the insurer), but rather, the question is whether failure to appear at trial deprived the insurer of testamentary evidence that would have made liability a jury question which could have supported a verdict for the insured ("Substantial Impact Test"). In this case, the insured and her brother could have given testimony that would have created a jury issue, and therefore, the insurer was prejudiced. Without the defendant present, only the plaintiff was there to testify - otherwise it would have been their testimony against each other. Notes: - An insurer's case is weakened or strengthened by its attempts to get the insured to cooperate - Many courts use a substantial impact test, but the question is usually the same - whether the breach prejudiced the insurer, and the answer often depends on who the burden belongs to Miller v. Shugart - is settlement non-cooperation? - when the insurance company defends under a reservation of rights while seeking a declaratory judgment on coverage, the insured may settle with the claimant while the issues of coverage and liability are still pending, including a settlement for or above policy limits which gives immunity to the insured, but the claimant will have the burden of proving later whether the settlement was reasonable under the circumstances (whether a reasonably prudent insured would have settled for that amount) in order to make the insurer liable. In this case, evidence was presented in testimony from insured's independent counsel which showed that he thought the insured would be liable for more than the policy limit. Notes: - A growing consensus seems to be that when the insurer does not defend or defends under a reservation, the insured does not need the consent of the insurer in order to settle. By not defending without reservation, the insurer bears the risk that the insured will settle, unless the insurer wins on the issue of coverage in the declaratory action, in which case the plaintiff who has agreed to not go after the insured is the one who loses. This type of agreement is highly beneficial to the insured, who is insulated so long as the agreement was reasonable. - Burden: majority - the insurer bears burden; minority - insured - Types of non-cooperation: failing to appear, lying, collusion

What is a "pre-existing condition"?

Preexisting Condition Exclusion - Defined as afflictions for which insured was diagnosed or received treatment before coverage, or symptoms for which reasonable insured would have sought diagnosis or treatment before coverage - As of HIPAA, the former is the definition. The pre existing condition must relate to condition for which medical advice treatment or diagnoses was received or recommended. The lookback period is only 6 months. No longer. There is also an exclusion period of not more than one year with credit for previous coverage unless there is a gap of 63 days.

What penalties can an insurer face for failing to defend?

Remedies for Breach of Duty - Attorney's fees and costs incurred in defending the litigation - Judgment within limits on covered claim (and foreseeable consequential damage - interest paid to borrow money for defense) - Excess judgment/settlement (not generally awarded in majority, but an exception: prejudicial withdrawal, default judgment) - Punitive damages? Bad faith? - Attorney's fees incurred in action against insurer? Not unless the policy says so. Or if the insurer acted in bad faith - completely unreasonable. - Emotional distress if bad faith - Settlement within limits when the complaint alleged claims within the coverage - even if some of the claims were for damage outside of coverage - The majority of jurisdictions apply the rule in Gray and say you are estopped from denying coverage Parsons v. Continental National American Group - in the underlying tort case, the insured is charged with battery and brutal assault of his neighbors. The claims adjuster does an investigation and writes a letter to the insurer, initially finding that the boy was out of control of his actions, therefore the insurer should settle with the victims. Those attempts fail and the parents sue the insured for battery and negligence. Once the tort suit starts, the retained counsel for insured does a thorough investigation, and finds that the boy was fully aware of his acts and knew what he was doing when he committed the assault. So, the insurer defends with a reservation of rights. The judgment against the insured is for 50k, and the plaintiffs try to get the money for the judgment. The question was whether an insurance carrier can deny coverage under its policy when its defense is based upon confidential information obtained by the carrier's attorney from an insured as a result of representing him in the underlying tort action? The same attorney retained by the insurance company was used in the underlying tort case for the insured who assaulted a family, then used again later in the suit for coverage to deny liability based on an exclusion, using information he got while representing the insured in the underlying case, where if intent was found the exclusion would apply, but if negligence was found, the insured would be covered. This presented a conflict of interest, and while there was a reservation of rights letter, no letter informing the insured of the conflict of interest or offering independent counsel. This constituted a conflict of interest which estopped the insurer from denying coverage. They should have notified the insured or the lawyer who represented the insured should have withdrawn from the case. Notes: - The counsel always owes a primary duty to the insured. But he is getting paid by the insurer. - In this case, the court not only awarded the policy limit of 25k, but also the full 50k excess judgment - Wouldn't withdrawal signal to the insurer something? Some states you can tip off the insurance company by withdrawing, others not. But in any case you cannot do what was done here - using information you got by representing the insured to then deny coverage. BAKER DONELSON v. Jack MUIRHEAD (MS) - Empire Truck Sales met at the Ramada Inn. Two employees of Empire are at the hotel bar. One of them is drunk. He gets in an altercation with another bar patron. Two employees of Empire are at the hotel bar. One of them is drunk. He gets in an altercation with another bar patron. A boss says to the other employee to get the drunk out of the bar. They get in a fight outside somehow with someone from the bar. Self-defense gets brought up. The guy who followed them out sues them and Ramada, and also Empire. The claims include negligence as well as intentional torts. - Insurer's attorneys were not negligent in advising insurer that insurance policy did not cover assault of bar patron by insured's employee following annual sales meeting; employee was not a named insured, attorneys advised that bar patron's injuries were not the result of an accident, that employee was not acting within the scope of his employment or performing duties related to insured's business, and that the harm inflicted was not covered because of the policy's exclusion for bodily injury expected or intended from the standpoint of the insured. - Employer's insurer did not have a duty to defend employee in bar patron's action for assault following annual sales meeting such that insurer was required to reimburse employee for his attorney's fees, as insurer made reasonable decision that the policy provisions did not require insurer to provide a defense for the employee's actions. - Where an insurer makes the decision not to provide a defense to its insured, it runs a substantial risk of a later determination that a defense should have been provided, and such decisions, absent an arguable, reasonable basis, can result in a finding of bad faith; - But where it is later conclusively determined that the claimant was not an insured, and the insurance policy did not provide coverage for the claims, an insurance company has no duty, contractual or otherwise, to provide a defense or to reimburse attorney fees already expended. Moeller v. American Guarantee (MS) - Moeller, a lawyer for a firm, sues the firm for contractual breach of the employment agreement, and defamation. The law firm had a liability policy (466 covers most damage, but p471 covers personal and advertising injury liability, aka defamation) that covered defamation. The lawyer also named individual members who were insured under the policy. Liability insurer chose to defend insured under reservation of rights, and the law firm also hired independent counsel. Those lawyers worked together and counterclaimed for breach of contract, repayment, tortious interference, and defamation. The lawyer was then also covered by the same policy as the firm. The plaintiff ended up winning on the contract claim. A conflict of interest was created when the insurer represented the firm in prosecuting a counterclaim against the lawyer for defamation, when it had a duty to defend him, even though he didn't give them notice (not required since the purpose was to give them notice of the suit, and they already had that.) The lawyer did not get punitive damages for the insurer's failure to defend because he was a lawyer and failed to read the policy or give notice. - Whenever lawsuit against insured contains allegation of claim which is covered under policy, insurer has contractual duty to furnish defense, whether claim later proves to be meritorious or not. - CONTRARY to SOPSPHONE: Liability insurer has absolute duty to defend complaint which contains allegations covered by language of policy; it has no duty to defend claim outside coverage of policy. - If liability insurance policy covers only portion of claim against insured or covers only one theory of liability, attorney should undertake to represent only interest of insurer for part covered, and insurer should afford insured ample opportunity to select own independent counsel to look after his interest. - If conflict of interest arises during attorney's representation of liability insurer and insured, attorney should withdraw from representation of either if there is any possibility that representing one and not the other may be injurious to client attorney ceases to represent. - Liability insurer's wrongful failure to defend insured against counterclaim by another insured did not entitle insured plaintiff to punitive damages; insured plaintiff never made demand under the policy, was experienced attorney, and knew that insurer was defending other members of law firm against his claims, but made no effort to obtain copy of policy.

What is the requirement of an insurable interest?

Requirement of an Insurable Interest Gossett v. Farmers Insurance - a family had no insurable interest in a house beyond the work they did to improve it and possibly the items they owned inside when it burned down because they did not own the house, the deed to the house, a mortgage on the house - in essence, they had no ownership interest in the house, so they could not legally insure its loss. Insurance is here to provide against a risk of loss, not to create the possibility of gain. You cannot insure something for which you have no insurable interest, and here the family had no title, contract right, mortgage, and so on. Any equitable legal interest would have been insurable: work and improvements on the house as a lien on the house. But that would only be insurable for the value of the house. Notes: - Estoppel and waiver don't usually apply to these cases because the defense is so important - There are four tests for an insurable interest: 1. Legal or Equitable Interest, as long as the interest has value - fee simple, lien, etc 2. Factual Expectancy test - expectations of economic advantage contingent on continued existence (Would this apply to Gossett v. Farmers? 3. Contract Right that depends on continued existence - secured creditor/creditee 4. Potential for suffering Legal Liability for Destruction - if insured has legal liability for the destruction of someone else's property, like a bailor/bailee situation For property insurance, You must have an insurable interest AT THE TIME OF LOSS for property insurance. For life insurance, you must have an insurable interest AT THE TIME OF EXECUTION of the policy.

Care insurance: what is the named driver exclusion and is it valid?

Scope of Compulsory Insurance Requirements St Paul Fire v. Smith - the named driver exclusion - whether a named driver exclusion violates public policy - the defendant in the underlying accident suit was originally on his parents' insurance, but when the company found out about his record (dui etc) they removed him from the policy and made the parents sign an exclusion: "Driver Exclusion Policy Number: xxxxxxxxxxxxx Named Insured: Smith, Allen and June This Endorsement changes the policy. Please read it carefully. We will not be liable for accidents or losses while any auto or motorhome is driven by: William R. Smith. - signed by Allen, June, and William" The argument was that the exclusion violated public policy by allowing insurers to get around the requirement to cover all drivers driving with the insured's permission. This court looked at the statutes and said that the exclusion was not against the law. Notes: - While the public policy wasn't strong enough to overcome the named driver exclusion, it was strong enough to overcome a valet exclusion - Some states deal with the Smith problem by enacting a rule that the insurer must pay the victim, but can seek reimbursement from the policyholder for excluded damages - Household Exclusion - most states have held it inconsistent and invalid - MS has recently ruled that this exclusion is void as against public policy

What is the insurer's duty to defend when some claims are covered and some are not?

Sopshone First Bank v. Pacific Employers Insurance - the insurer wanted to recover for the costs of a counterclaim and the costs of defending claims that were not covered which it defended. The court ruled that the allocation and recovery of costs attributable to the defense of claims not covered is not permitted so long as one or more of the claims alleged WAS covered by the policy. The recovery of the cost of a counter-claim is permitted, though. Rule: when claims are mixed, some of which are clearly not covered and some of which are, the insurer has a duty to defend the entire suit. Rule (Majority): the insurer may allocate the costs of defending the parts of the suit not covered under the policy. Rule (minority): the insurer may not allocate unless there is an agreement to that effect in the policy In this case, the insurer's sending a letter notifying the insured that it would allocate defense costs and indemnity payments between itself and the insured for covered and uncovered claims had no effect on its duty to defend or its ability to allocate the cost of the defense under the minority rule, because the insurer may not unilaterally alter the terms of the contract. Rule: insurers are not required to cover the cost of counter-claims, and can allocate that cost Notes: - Courts may treat differently a situation in which there are mixed claims - some covered and some not - than a situation where there are only uncovered claims - Courts may treat differently a situation where there were claims that were never potentially within coverage vs. claims that were potentially within coverage - the latter you have a duty to defend so you may not be able to make an allocation agreement about them - An issue of conflicting interests might not always arise in a reservation of rights situation, for example, when there is a case for property damage and the only reason coverage wouldn't apply is a wind exclusion, which won't be an issue at trial, as opposed to a case where the jury may find battery or negligence, and only negligence is covered.

How does subrogation work in property insurance?

Subrogation Subrogation is when one party is substituted for another in terms of the rights of one party to sue a third party. For example, when the insurance company covers your loss by fire damage, they gain your cause of action to sue the negligent tortfeasors. Any defense that would have been available against you is available against the insurer, and the insurer cannot have subrogation against you the insured. There are two types of subrogation: - Equitable Subrogation - legal subrogation - arises by operation of law - Contractual Subrogation - conventional subrogation - arises by agreement of the parties Most courts hold that an insurer has rights of subrogation regardless of whether the contract specifies such. Two main functions of subrogation: - Implement the Principle of Indemnification at the heart of insurance - Allocate the ultimate financial responsibility for some insured losses to the third parties who cause these loses without producing windfalls for the insured Generally, the insured interfering with the insurer's right of subrogation will void coverage. (ie, releasing your negligent neighbor from liability). The third party is not released from subrogation liability to the insurer if the third party has notice of the insurer's right to subrogation. At least one plaintiff was allowed to recover from a tortfeasors when his losses were greater than his policy limit plus recovery available from the defendant, because allowing subrogation would go against the policy behind the rule (also the subrogation clause was poorly written). So, if an insured settles with a tortfeasors before the claim is paid, the insurer does not have to pay the claim because the insured has interfered with subrogation rights. If the insurer has already paid the claim and the insured settles with the tortfeasors, the answer depends on whether the insurer has given notice. If there was notice of subrogation rights, the release is ineffective. Great Northern Oil v. St. Paul Fire - an insured may defeat an insurer's right to subrogation by: 1. Settling with the wrongdoer after loss but before payment of the insurance 2. Settling with the wrongdoer after payment under the policy 3. Or entering into an agreement of release with the wrongdoer before the policy is issued The plaintiff didn't fit into any of these examples because it entered into a construction contract after the policy was issued which exculpated the third party from liability. The question was not whether this inhibited the insurer's right to subrogation - that much was certain. The question was whether this interference with subrogation rights defeated the plaintiff's right to coverage under the policy. The defendant had a good argument: allowing the plaintiff to recover after releasing the contractor from liability would force the insurer to take on a new risk: becoming the insurer of both negligence by the plaintiff and by the third party. The court didn't care though, and ruled that the plaintiff was still covered. The court reasoned that the defendant could have put in its policy terms an express statement that the plaintiff may not enter into a contract which releases potential tortfeasors from liability. So, at least where loss has not yet occurred, an insured may enter into an agreement exculpating a third party from liability without voiding his coverage where the policy does not expressly say otherwise. In the sample policy, a policyholder is specifically allowed to enter into an exculpatory agreement pre-loss without sacrificing coverage.

In liability coverage, what is the Business Risk Exclusion?

The Business Risk Exclusion 467 - the business risk and professional services exceptions, 470 - property damage to your product, your work, to impaired property, recall of products. Weedo v. Stone-E-Brick - there is a difference between the negligent work of the worker making him liable for the faulty work such that he has to replace it and the liability he incurs by his negligent work making him liable for injuries caused to others while working. One source arises out of his contractual or business enterprise liability. The other is in tort. Only the latter is covered by a CGL. The cost to repair or replace faulty workmanship is not covered under the business/work performed exclusion. Property damage that is the cost of removing a faulty product and which does not cause any further property damage other than the work or materials themselves is not covered. Liability insurance is designed to protect you from damage to people or property, not from shoddy work. Rule: exclusions are read separately - just because you fall within the exception to one exclusion, does not mean you are not excluded elsewhere

Liability Insurance: what do "property damage" and "damages" mean under the policy?

The Meaning of "Damages" and "Property Damage" McDonald v. Ins Co of NA - "All sums which the insured shall become legally obligated to pay as damages because of... property damage" were covered. McDonald entered into an agreement with the EPA that it had caused pollution and had to pay to fix it. The question was whether this was covered under the CGL policy. The court said that nearly all courts have concluded that response or cleanup costs incurred under environmental protection statutes are covered by this type of policy language. Two possible theories can account for this. 1. The costs are plainly damages that the insured is legally obligated to pay as compensatory damages because of "property" damage, or 2. The terms "damages" and "legally obligated" are ambiguous and interpreted in favor of insurance Coverage is also usually extended to injunctions against a company by the EPA because to do otherwise would make coverage dependent on the fortuitous nature of which route the EPA goes in punishing companies. Another reason is to uphold the expectations of the insured. Some federal courts have held that only "damages to natural resources" and not "response costs" are damages under CGL policies because response costs are not NECESSARILY damages. Another reason to deny coverage is the distinction between equitable and legal relief - "legal damages" are payments to third persons when those person have a legal claim for damages which is different from an injunction, restitution, or other remedy. This court decided that restitution or injunction could be damages because "damages" was ambiguous in the policy. The next question was whether the injunction or restitution was a proper measure of "property damage" for which the CGL would be covered. Costs incurred to pay for preventive measures taken in advance of pollution are not "damages because of property damage." But, after property damage, costs for preventive measures taken after the pollution are such damage and are covered. Notes: 1. There is a massive divide on coverage for pollution as property damage 2. The EPA may use CERCLA to make you liable for damages in three situations: a potentially liable party may decide to clean up a site in anticipation of government action, the gov may order a potentially liable party to clean up, or the government may clean up and sue you a. Cleaning up in a CERCLA situation before ordered to do so is USUALLY covered because you have a legal obligation, but courts are split often when it comes to whether there is coverage for repairs made in anticipation but there is not yet a legal obligation to repair b. When the EPA issues an injunction ordering you to clean up, the traditional rule is that the cost of compliance is not insured. This rule was pre-CERCLA. Most courts have said that when you are ordered to clean up under CERCLA it is covered because to do otherwise would condition coverage on how the EPA decides to punish you. c. The clearest case is when the EPA cleans up and sues you - that should obviously be covered 3. Most courts agree that cleanup liability under CERCLA is damage incurred "because of property damage". The issue arises as to preventive measures taken to keep the damage from spreading to other areas is covered. 4. Is a civil penalty for pollution "damages" that the insured is obligated to pay because of "property damage"? F & H Construction v. ITT Hartford - welding inadequate pile caps onto driven piles did not constitute property damage when there was no physical injury to the piles or other property and the defective pile caps were ultimately used as modified to meet design specifications. The issue was whether the welding caused "property damage". Rule: "property damage" is physical injury to tangible property. The majority rule says that incorporating a defective component into a larger structure is not property damage until the defective part damages some other part of the system. Under this rule, property damage is not established by mere failure of a defective part to perform as intended, nor is property damage established by economic loss such as diminution of value or cost to repair. Liability insurance is not designed to guard against claims that the work done is inferior or defective. Rather, the coverage is triggered when the defective work injures property other than the insured's own work or products. Liability insurance is not a performance bond. If you want to insure the quality of your work, get a performance bond. So, as here, where the only damaged alleged are the costs of modifying the pile caps and the lost bonus for early completing, there is no coverage. There are intangible economic damages rather than damages to tangible property. Similarly, diminution in value would not be damage to tangible property. Welding the piles did not damage them, it merely made them inadequate for their intended purpose.

Liability Insurance: how do we determine the number of "occurrences"?

The Number of Occurrences Metro Life v. Aetna Casualty - the insured in the underlying tort is being sued over asbestos. There were about 200,000 claims against the insured, and the insured settled for, on average, 2,500 per claim. The insurer had a 25 million policy limit per occurrence. So the insured was on the hook for about 500 million. If each claim was one occurrence, then the insurer was on the hook. If each claim together forms one big occurrence, (ie the occurrence was the failure to warn people about asbestos), then it's the other way around. As a matter of law, the court decided that the policy language, "all bodily injury and property damage arising out of continuous or repeated exposure to substantially the same general conditions shall be considered as arising out of one occurrence," (AKA a "batch" clause), means that claims could be aggregated together as one occurrence if the exposure to the asbestos occurred around the same time and place to a specific group of people. Construe ambiguities against the drafter doctrine did not apply because both parties were insurance companies. The actual exposure was what triggered liability, not the failure to warn. Tests: What was the Number of Occurrences? - Number of Causes (majority) (so the release/exposure of asbestos) - Number of Effects (minority (from the standpoint of the victim) (so the number of plaintiffs with injuries) - Number of events triggering liability (immediate event, last link in causal chain, really a version of the cause test) (what the court used?) Many policies now also have a policy limit for aggregate occurrences as well as their per-occurrence limit.

What is the Omnibus Clause and how does it relate to Permission to Drive?

The Omnibus Clause Curtis v. State Farm - permission to drive - the omnibus clause said that drivers not permitted to drive the insured vehicle were excluded from coverage. Where the driver at the time of the accident did not have express permission from either insured, the issue was whether he had implied permission. The parent insureds did not know that their daughter had taken the car, nor did they give her express condition. They gave their other two daughters permission. Those daughters maybe gave the third daughter permission. She turned around and gave her express permission for the underlying defendant to use the car. So the question was whether she had implied permission. Testimony conflicted as to evidence whether her parents had given her implied permission to drive. The court ruled that implied permission could not stretch to a THIRD permitted person, especially when the named insureds and first two daughters never knew of the third daughter's decision to let an uninsured drive. The first two daughters were not named insureds - you cannot stretch the meaning of that term beyond its contractual meaning. Notes: - The meaning of "permission" LIBERAL RULE - coverage all the way down - once the named insured gives permission to another to drive, that driver and all others in the chain of permission have full authority to grant permission, regardless of any restrictions on the scope of use contained in the original permission MINOR DEVIATION - majority - minor deviation, still covered - the issue is the degree of deviation from the owner's permission, and the question, becomes one of fact and degree. CONSERVATIVE RULE - if any deviation, no coverage - deviations from the scope of the original grant of permission take the use of the vehicle outside the scope of coverage - Sample Policy and permission - the sample policy in Part A exclusion 8 says that there is no coverage for a driver who lacks a "reasonable belief" that he has permission to drive. However, the sample policy also defines anyone using the insured vehicle as an insured.

What is the "owned property exclusion" in liability coverage?

The Owned-Property Exclusion Page 469 - the owned property exclusion - exists because the insurance company wants you to get first-party insurance for your own property Hakin v. Mass Ins. Insolvency - the majority rule is that a homeowner's liability policy with an exclusion for "property damage to the insured's property" does not exclude damage where the insured causes some kind of leak or contamination, and the remedial cost to clean up off and on the insured's property is to avoid further contamination. So the majority would ask whether the on-property cleanup was in response to and in order to avoid further damage to others. Notes: - Potential types of cases: • Damage only to owned property and no threat to other property (exclusion almost always applies) • Damage only to owned property but damage to other property is imminent (majority: no coverage; minority: insured can recover cost of preventing damage to other property) • Damage to both (majority: exclusion doesn't completely bar recovery, but costs incurred for the sole purpose of remedying the insured's property is excluded) - How do you allocate the costs? - Who owns the groundwater? (groundwater not usually your property)

In liability coverage, what is the Pollution Exclusion?

The Pollution Exclusion American States Ins v. Koloms - owners of a furnace were sued for negligent operation when the defective furnace released carbon monoxide, exposing people to dangerous conditions. The insurance company agreed to defend but reserved the right to avoid liability, then later filed a motion for declaratory judgment on the issue of coverage. They said the absolute pollution exclusion excluded coverage for carbon monoxide, both a dangerous irritant and an official pollutant under the Clean Air Act. Carbon monoxide poisoning from a defective furnace was not within the pollution exclusion because the historical purpose of the exclusion is to eliminate liability only for those hazards traditionally associated with environmental pollution. While it is true that the plaintiff's faulty furnace was leaking carbon monoxide into the air which is harmful and damaging and even a known pollutant, it was accidental and not the kind of long term pollution that the EPA goes after companies and forces them to clean up. To interpret it so broadly would allow the clause to have near infinite application. The exclusion only applies to traditional environmental pollution. Many courts are wary of applying the exclusion outside of an EPA ordered cleanup situation. Notes: - Courts are divided. Some say the clause is unambiguous and enforce it as written. Some courts exclude any discharge of a pollutant. Some require it be discharged into the "environment", some require the substance to be a waste or a byproduct rather than a useful product, some apply the exclusion to any contaminant or irritant, and some apply the exclusion as written, while others do not. - "Sudden and Accidental" exclusion came before the absolute exclusion, and may still come into play in cases where the pollution happened long ago. Some courts held the term sudden and accidental means abrupt - so gradual damage is not covered; others say no temporal restriction, or that sudden is ambiguous and can mean abrupt or unexpected. - Mold. This is a big issue under this exclusion. - Climate Change is a growing issue

In an liability policy, when is coverage triggered, and how can this affect an insured with multiple policies?

The Trigger and Allocation of Coverage American Home Products v. Liberty Mutual - mothers were taking drugs from this company which caused latent diseases which would only manifest much later after childbirth, causing babies to be born with disabilities. The question was when the defective drug's damage to people "occurred." Rule: "Property damage" must occur during the policy period. One side wanted the time of exposure, while the other wanted manifestation. Possibilities: - "Exposure Trigger" - coverage is triggered when the claimant is exposed to the damaging instrumentality. This is easier to apply, avoids the problem posed by the manifestation trigger. This is also arguably more consistent with the reasonable expectations of the insured. - "Actual Injury Trigger" - coverage is triggered at the time of actual injury. This is tough to say and would require a very fact intensive analysis. On the other hand, this trigger is inconsistent with the language of the policy (except where exposure causes immediate injury). Not every exposure results in injury. Other tests are often used because the actual injury trigger is so hard to apply. - "Manifestation Trigger" - coverage is triggered when it becomes manifest or when it produces symptoms that should have put the injured person on notice. Should only trigger one policy. But it may be inconsistent with the reasonable expectations of the insured. Also, as soon as the disease is known, insurers will exclude coverage. Neither pro nor con: it is likely to trigger later policies with higher limits and likely to only trigger one policy. Assume the insured incurred 7 million in damages with an actual injury trigger, and any insurance policies in effect from 1969-1983 are triggered. The insured had no coverage 1969-1973, 1974-1978 100k in primary, and 1 million in excess, then 1979-1984 500k primary and 5 mil excess. For any trigger that can trigger more than one policy at a time, what do you do? Possible rules for allocation among multiple policies: - Pro-rata by Time on the Risk - take the loss and divide it by the number of years - This makes an assumption that the damage was the same, roughly, throughout. The silicone case suggests this is best when damage is indivisible. This is good and bad in that it is more efficient and less accurate. In this case, the insured completely loses 1/3 of the loss. - Pro-rata by Limits - based on the amount of coverage available. So no coverage for the first five year period. 1 million would be allocated to the first five year period. 1 million for the second. And 5 for the last. You figure out the proportion of coverage and then apportion the damage the same way, fractionally. The court will arbitrarily assign the uncovered period to the insured at the pro-rata rate of the lowest insured period. This is better than the pro-rata by time on the risk method for plaintiffs, since it may result in the plaintiff being liable for less, perhaps 1/7 of the loss, rather than a full 1/3 risk. (Example: if the loss is three years, and 3 million dollars, and insurer A insured for 1 mil, insurer B for 2 mil, and insurer C for 3 million, then C would be liable for 1.5 million) - Joint And Several - you can collect from any insurer up to their full policy limit until you have covered the entire loss. Very insured-friendly. The insurance company would then go after the others for contribution. This is a vertical method as opposed to the previous two, horizontal. - Joint And Several, Pick One Year - like before but you only get to go after one insurer. - Damages as Proven - what the name says. Way too expensive to figure out. Silicone Implant Insurance Coverage Litigation - the insured was potentially legally obligated to pay sums as damages to mass tort plaintiffs for bodily injury as a result of silicone breast implants causing disease. Silicone settled with the plaintiffs for a hefty sum and the question was which policies were implicated and how the damages should be allocated. - One argument was that there was no actual injury. That argument was void because the insurers had already assumed the duty to defend and settled. You cannot settle for a huge amount of money then argue there was no injury. - Another issue was what trigger to use. The state used the Actual Injury trigger. The question then became when the actual injury occurred. The trial court said the injury occurred at the time of implantation, and continued to occur, based on expert testimony. This triggers several policies. - So the next question was how to allocate. The trial court used the pro-rata by time on the risk method. The reviewing court said that this test makes sense where there is an ongoing, INDIVISIBLE injury. However, in cases where there is one "primary" spill or accident, which then continues to leech out or cause continuous damage, then you do NOT allocate - only the policy for that year is implicated. (You can't insure against a known loss) "Discrete and Identifiable Event" This avoids the allocation problems.

What is the doctrine of "Reasonable Expectations of the Insured" and when might a court use it to find in favor of coverage?

This principle is selectively and variously applied, and not a majority rule. But at some point courts began, even when a policy provision is not ambiguous, but is difficult for the layperson to read and contains surprising limitations on coverage, construing against the drafter. The principle is to honor the reasonable expectations of the insured. Atwood v. Hartford Accident - the electrician's insurance policy said he was insured for damages resulting from negligence during jobs, but not for damages arising after "completed projects". This was buried deep (hidden) within the contract and the court found that an ordinary electrician in the plaintiff's position could not have been expected (he would be surprised or shocked to find the limitation) to read and understand that he was not covered for injuries that occurred due to his negligence on the job, but which arose after the completion of the job. Even his agent didn't think he had a gap in his coverage. Notes: - There seems to be a presumption of reliance on the understanding plaintiffs have in these type of cases - Unconscionability seems to be an issue - Actual versus reasonable expectations play an unclear role: it may favor the insurance company if unexpected provisions are pointed out or made clear - Courts are also divided as to whether to apply this doctrine only to individuals or also to businesses - Some jurisdictions will only apply the doctrine if there is an ambiguity. Others will apply the doctrine will apply it regardless. Others will apply it if they think the policy is misleading. Atwater Creamery v. Western National Mutual - Atwater had a policy for burglary insurance. Someone broke in and stole 15k worth of chemicals. Western denied coverage based on a clause that required physical proof of burglary, saying that there was no visible marks of physical damage to the outside entrance or to the interior point of exit. The court rejected construing the term as ambiguous because it was written clearly. Instead, the issue is that no reasonable person buying burglary insurance would expect such a limiting exclusion, which lets the insurer avoid coverage even when there was clearly a burglary. Normally some ambiguity is required, but there is no ambiguity here. The clause was in plain sight. To interpret the contract against the insurer here would require full on acceptance of the doctrine of reasonable expectations. Therefore, the contract was construed to provide coverage. The purpose of the clause was to keep the insurer from being liable from inside jobs or fraud. Since the investigation clearly averted that risk by showing it was a burglary (but not by evidence of forced entry), it is okay to honor the reasonable expectations of the insured. Notes: - The court found that the purpose of the relevant provision was to prevent fraud or inside jobs. But the evidence showed that no one expected that this was fraud or that it was an inside job, so the court was okay with construing it against the insurer. It might have gone differently otherwise. - So here is an example of a court full on applying the doctrine to a business where the contract was clear - In reasonable expectation cases, the insurer after losing has two options: increase costs, or try to dispel the expectation by explaining the coverage to the insured - Most courts will look for something ambiguous or at least misleading before applying this doctrine. As a result, every homeowners insurance policy in MS says in big letters "YOU ARE NOT COVERED FOR FLOODS" - So, Percy thinks that before you enforce something as a reasonable expectation, you should make sure you are enforcing coverage most people would want Tuesday: Role and Authority of Agents 64-86, sample homeowners policy definitions and part A (195-210 and all provisions that affect section 1) (No class February 20)

Under a claims-made policy, are you covered after the policy ends?

Thoracic v. St Paul Fire and Marine - the policy stated there would be no coverage for claims made after the termination date, even if the claim arose out of acts before the termination date, unless the insured purchased an extended reporting endorsement or a replacement policy. It did neither. St. Paul sent letters warning Thoracic there would be no coverage. Then someone sued for something that happened during the policy period. St. Paul even got, in writing, from Thoracic, a waiver stating it understood. The difference between an occurrence policy and claims-made policy is that an occurrence policy covers an act or omission that occurs within the policy period, regardless of the date of discovery or the date the claim is made or asserted. A "Claims made" policy triggers coverage when notice of the claim to the insurer - the negligent act is discovered and brought to the attention of the insurer within the policy term. The plain and unambiguous language of the policy stated that thoracic was only covered for things it reported during the policy period. The rule of occurrence policies that states that delay only absolves the insurer when the delay was unreasonable and prejudices them does not apply to claims made policies. Neither does the argument that it was impossible to report within the policy period find traction. These arguments would make the policy an occurrence policy. Notes: - It is the majority rule that in claims made policies, both notice and claim must be filed within the policy period for coverage to attach

What do insurers do to try to address how courts handle misrepresentation in an insured-friendly way?

To dodge these reforms, insurance companies sometimes try to word the insurance coverage in terms of coverage or conditional provisions, conditioning coverage on something, rather than making it a warranty or representation, thus avoiding the issue of materiality. The distinction is not an easy one. Some courts look at the wording: whether it's written like a warranty "A represents or warrants that X," or written like a condition, "There is no coverage for X as long as Y." (The key in the second sentence is that it contained no warranty). Another approach is to hold warranties and representations apply to "Potential" losses, while coverage provisions apply to "Actual" causes of loss. (Potential: fire that caused damage WHILE there was gasoline on the premises is a potential loss; Actual: Fire caused by the ignition of gasoline is an actual loss constituting a coverage provision.) If a provision is ruled to be a representation, there is still the issue of what a misrepresentation is and what its elements are. TO VOID COVERAGE based on a misrepresentation AN INS. CO. must prove several things. • A representation must be false, (substantial truth is enough) • material, (see above for what material means; something that actually caused your injury, or an underwriting manual showing that the misrepresentation would have increased the risk and resulted in a higher premium or not releasing the policy. A few jurisdictions define materiality as purely whether the misrepresentation contributed to the loss. Most define as increasing the risk. So usually showing that you would have not issued "such" a policy - either at all, at a different premium, or with a lower limit) • and induce justifiable (overlapping with materiality using either an objective or subjective test as to whether an objective insurance company would find that this information would increase the risk, or the specific insurance company in question. For example, an insurance company might be the only one on the market that queries into a doctor's temper) reliance (to what degree is a question) by the party who suffers damages as a result of the misrepresentation. (You can't rely on something you know is false. So many cases arise where the agent KNEW that the representation was false.) • (minority rule: intent required)

Property Insurance Coverage: what is physical damage?

Trigger and Occurrence You must have an insurable interest AT THE TIME OF LOSS for property insurance. Port Authority v. Affiliated - port authority had an all risk policy for physical damage to property and wanted to collect for the cost of repairs to buildings in order to remove dangerous asbestos. At all times, the asbestos levels were within legal limits. The question was whether the requirement of "physical loss" was triggered, causing the coverage to take effect. Rule: the burden of showing loss is on the plaintiff The lower court ruled that coverage was only triggered if the release of dangerous asbestos was imminent, or had already happened, in such a way as to make the buildings unusable or uninhabitable. Because the plaintiff could not produce evidence that such was the case, the court ruled that the plaintiff's actions were merely preventative and not in reaction to actual physical loss, which does not trigger coverage. Distinction: third-party insurance protects you from liability to others for damage you are responsible for, while first-party insurance protects you and your assets from loss. In other cases: - Actual release of asbestos fibers onto carpet and furniture was enough to trigger coverage although use of the building continued - Actual presence of dangerous asbestos did not trigger coverage when the asbestos was present when the plaintiff bought the property - An internal defect in a building already present at the time the policy was purchased was not covered Rule: physical damage means a distinct, demonstrable, and physical alteration of its structure. Physical damage not perceivable by the naked eye requires a higher level of proof (such as no longer functioning) In the present case, the building had not lost its utility and therefore had not suffered physical loss. The mere threat of future loss or mere presence of asbestos is not enough to trigger coverage. Notes: - If the asbestos had dispersed and made the building dangerous, coverage would have triggered - It may be enough to show that a structure's "value and function have been seriously impaired" such as if the building had to be shut down while people removed the asbestos - Suppose multiple policies. Also suppose something has been getting progressively worse, like a crack in your basement, over the years. Which policy is triggered? This is the "loss in progress" doctrine. There are several possible rules. 1. One possibility is that the policy period when the damage was discovered or should have been discovered. 2. Another is when the damage began. 3. Finally, any policy periods during which any damage actually occurred. - Refer to the WTC case for occurrence issues - If something is bound to happen, it isn't a risk, but rather, a known loss. Also it is possibly wear and tear, which isn't covered because it isn't a risk. You're looking for a "fortuitous loss". Latent vices, inherent defects, and so on, are not risks.

When does uninsured motorist coverage apply, is a collision required, and can the policies stack?

Uninsured Motorist Coverage In MS, the court has ruled that any waiver of UM insurance by you must be made knowingly, and the insurance carrier has the burden of showing that you knowingly waived coverage. A signed document saying you knew may be considered but is not dispositive, and you may rebut it. Whether you made a knowing waiver is ultimately an issue of fact for the jury. Allstate v. Boynton - a vehicle may be an "uninsured motor vehicle" even if it is covered by a policy, if that policy does not provide coverage for that particular occurrence causing plaintiff's damages. However, "legally entitled to recover" does not apply in the context of an uninsured tortfeasors immune from liability because of the workers compensation statute. Therefore, in this case, the driver had a policy which did not apply, and was therefore within the meaning of "uninsured," but the plaintiff was not "legally entitled to recover" from the tortfeasors due to the WC statute. Note: the sample policy in Part C section A says "...a land motor vehicle or trailer of any type... to which no bodily injury liability bond or policy applies at the time of the accident." Is the term "applies" there ambiguous? I would say yes. Simpson v. Farmers Insurance - hit and run clause - plaintiff was forced to run off the road to avoid a collision and hit a utility pole. The other driver immediately fled the scene. Plaintiff tried to recover under the uninsured motorist coverage section of her policy and the insurer denied coverage under the hit and run clause. The court had to decide whether that clause is enforceable or void for policy reasons. The hit and run clause normally requires that there be physical contact between the vehicles, but this court held that it does not as a matter of law. Other jurisdictions may hold the requirement enforceable. Taft v. Cerwonka - stacking - the issue was whether the plaintiffs could "stack" the uninsured motorist coverage provided for each automobile on the one policy underwritten by the defendant. The plaintiff had two cars insured by one policy for uninsured motorist coverage. Theories different jurisdictions use for justifying stacking: - The language is ambiguous - The statute for the jurisdiction requires it - Double-premiums theory - the payment of separate premiums for uninsured motorist coverage for each vehicle covered by the policy entitles the insured to stack the limits of liability for each insured vehicle of the policy. After all, if the insured had two different policies for two different cars, he would be able to stack. Some jurisdictions do not allow stacking. This court adopted stacking under the double premium theory. Notes: - Whether inter-policy stacking is permitted is a question for interpretation of "other insurance" clauses. But whether intra policy stacking is allowed is a question for the insurance agreement and public policy.

When will the court find that a policy provision is ambiguous?

Vargas v. Insurance Company of NA - the insureds had a policy for aviation insurance that was said to apply to death which happened within USA, Mexico, Canada, or USA territories. The insureds died in a plane accident in a flight between USA and Puerto Rico. The insurer denied coverage on the argument that the policy applied to America and Puerto Rico but not the space between, while the insured argued that it included flights between two places both covered. Rule: ambiguous clauses interpreted favorably for the insured. The insurer has a heavy burden of showing that not only is its interpretation of a clause susceptible to the meaning it asserts, but that this is the only fair interpretation. The average person reading the policy would not reasonably construe the policy as the insured does, and that the insurer's interpretation was the only fair one. So if there are multiple reasonable interpretations of the policy, the one most favorable to the insured governs. Analysis: it was a policy for airline insurance. Which is not just a few locations, but also a means of transportation. So while the insurer's interpretation is a reasonable one, so is the insured's. Read 43-63 for Thursday

What are insurance forms, why do they exist, and what are their pros and cons?

Virtually all insurance policies are now standardized form contracts. The main reason for this is that early insurers wanted to collect data on insured people: how much they should charge, what the expected loss was, and so on. To get data that correlated properly, insurers agreed that they had to be insuring on essentially the same conditions with all insureds. While this holds true for property/casualty/liability insurance, the same does not hold for health insurance. While the ISO plays a big party in standardizing the former, the need for such pooling of data was not the same for early life insurance companies, since mortality rates were much more well known. Additionally, most property/casualty insurance is sold on an individual basis, while health insurance is often sold on a group basis. Pros of Forms: • Consumers can make fair price comparisons • Standardized language is precise and clear - more so than various contracts • Makes pool claiming possible because insurers can compare with each other's data • Solvency is easier because pooling is more accurate Cons of Forms: • Anti-competitive effect on substance and pricing • Difficult to buy customized coverage • Discourages innovation

What's a warranty and what happens if you breach it?

Vlastos v. Sumitomo Marine (1983) - ins. co denied insured recovery on an insurance policy for a fire that burned down her commercial building. The insurance policy contained a provision that said "Warranted that the third floor is occupied as Janitor's residence." Evidence tended to show that at least part of the third floor was used by the second floor massage parlor. The janitor did live there. The trial court ordered that if the jury found that any part of the third floor was occupied by the massage parlor, the warranty had been breached. (If the floor was completely unoccupied this would also be a breach.) Vlastos appealed, saying that it was error for the trial court to say the warranty was unambiguous. Rule: if a party breaches a warranty, the other side does not have to perform (pay any insurance claims), but, if a party breaches a representation (i.e. misrepresents), then the other party has to show that the misrepresentation was material to the insurance contract. When there is doubt, the court will construe a clause as a representation rather than a warranty. In the present case, there was nothing in evidence or in the insurance contract to indicate that the clause was not a warranty. (Note: a warranty concerning the state of affairs as they are today is an "Affirmatory" warranty, while a warranty about how you will keep the state of affairs for the future, it is a "Promissory" warranty) It was error, though, for the judge to instruct the jury that the contract meant that the insured WOULD have the third floor occupied by a janitor, as this was not a promise of some future performance (Promissory Warranty), but a warranty about the current state of the building at the time the contract was entered into (Affirmatory Warranty). It was also error to tell the jury that the building had to be occupied by a janitor at the time of the fire. Another example: Lloyds of London v. Pagan Sanchez - it was warranted that covered persons would at all times comply with relevant statutes, laws, by laws, and other regulations, and that the equipment was properly installed and maintained in good working order, including the weighing of tanks once a year and recharging as necessary. Evidence tended to show that the boat's fire extinguishing equipment was unchecked and the boat had not been weighed or recharged. It was proper under maritime law (because under maritime law we use the strict rule on warranties) to deny the claim for failure of the warranty. The reason maritime law is a little more strict is historically it is difficult to prove what caused the boat to sink because, well, its at the bottom of the ocean. So normally under maritime law you don't have to show materiality. Additionally, the boat can't argue, as Vlastos did, that the warranty was affirmatory rather than promissory, because it including continuing obligations. Other Approaches: • while some courts do what Vlastos did and construe warranties as such but construe them strictly against the insurer, • other courts interpret them as representations and require materiality, • and still other courts interpret the warranty as a mere "present" rather than future or promissory warranty, thus only requiring that it be complied with at the time of creation. • A final approach is the say the warranty has been fulfilled as long as there is "substantial compliance." • The legislature in states have often acted to make law the representation decision. • "Materiality" is also variously interpreted in misrepresentation: either as having caused or contributing to the loss, or increasing the risk, or was fraudulent

What are waiver and estoppel and when can they

Waiver is an intentional relinquishment of a known right: ie, "don't worry, take a few extra days to pay." Estoppel is a statement made by insurer or agent upon which you detrimentally relied. Both can potentially get you coverage. To combat this, insurers will put information in the policy to try to put you on notice of the terms of the policy: whether and what authority an agent's statements have, and so on. Then it comes down to what degree your jurisdiction imposes a duty to read.i8ju Roseth v. St. Paul Property & Liability Insurance Company - the insurance agent and insured were discussing an accident: the insured had a driving accident and his cows were injured and some killed. The policy had an exclusion that only covered dead cows, not injured ones. The agent said he didn't have the policy in front of him but that the company would pay whatever it owed under the policy and he instructed the insured to sell the injured cows to minimize his loss. The insured told the agent he had an all-risk policy that would cover whatever the cargo policy did not. The question of law was whether the agent's statements estopped the company from raising the exclusion as a defense. Minority Rule: When an insurer or its agent misrepresents, even innocently, the coverage or exceptions of the insurance, to the insured BEFORE OR AT THE TIME OF CONTRACT FORMATION, and the insured reasonably relies to his detriment, the insurer is estopped to deny coverage. This can even create coverage that would not ever have existed under the terms of the policy. Notes: - Majority Rule: The agent or insurer with actual or apparent authority made a representation upon which the insured detrimentally relied. But neither estoppel nor waiver can be evoked to create coverage that was not provided for by the policy to begin with - they can only negate defenses, not create additional coverage. (So you could use estoppel to obtain coverage that would have existed had the misrepresentation been true, but not to create coverage directly against the policy - you have a duty to read). Generally, only conduct that occurs before or during contract formation can generate estoppel, not conduct occurring later.

What is an insurance binder and how do courts handle them?

World Trade Center v. Hartford Fire Insurance - the insurance policy covered up to 3.5 billion "per occurrence". The question is whether the two plane attacks counted as separate occurrences. The insurance broker, Willis, submitted a proposed form for coverage terms, called the "WillProp" form. Of the four insurers, only one submitted its own proposed form (The Travelers Form). The travelers form did not define occurrence, but the WillProp form did: all losses or damages that are attributable directly or indirectly to one cause or to one series of similar causes, irrespective of the period of time or area over which such losses occur. As of September 11, none of the insurers had issued a final policy form, nor had Willis issued the WillProp form as a final policy form. Each of the insurers had issued a "Binder" before September 11 that incorporated the terms of the WIllProp form. An insurance binder is a unique type of contract - binding but not final. Because the WillProp form was the one the parties negotiated and based negotiations on, the court ruled that this was the form that the binders incorporated, and thus its definition of occurrence applied, meaning that the attack was only one occurrence. The Travelers Binder, though, did not define "occurrence", so the question is the meaning of "occurrence" in their agreement. Extrinsic evidence is not admissible to contradict clearly unambiguous language contained in an insurance binder, but is admissible to determine the parties' intent with respect to the incomplete and unintegrated terms of a binder. (this is because binders are not complete agreements). Therefore, it was proper to introduce parole evidence such as the testimony of underwriters as to what "occurrence" usually means: "The willprop definition is typical," and the trade custom at the time treating occurrences using the WillProp definition. If there is a clear and uniform meaning for a term of art in contracts, the court will reject a claim of ambiguity and construe the undefined term using precedent. In this case, though, the court rejected the argument that there was clear precedent for what "occurrence" means under NY law. Notes: - If it came down to it, and the extrinsic evidence did not give the jury the answer, they would then have to resort to Contra Proferentem. In the willprop binder that would mean construing against the policy holder; in the Travelers binder it would mean construing against the insurer (construe against the drafter) - The jury would still have to decide, under the willprop definition, whether the attacks counted as one or two occurrences Coastal Hardware 120 So.3d 1017 - Coastal wanted to switch from a specified peril policy to an all-risk policy. The difference is that in the former, only the listed risks are covered. The latter covers everything that doesn't have an exception. The exceptions list included flood, earthquake, and mold. BUT, on the deductible page, next to wind, it said "excluded." The two page binder that was issued said that MOLD was the uncovered risk, but also said to review the policy forms and the quote, and that the final formal policy would eliminate the binder coverage. Confused, coastal calls their agent and asks if wind is covered? The agent says to check the binder and the quote. So Coastal looked and saw wind was not excluded, and cancelled their wind insurance. On August 24, Coastal received an electronic copy of the formal policy which contained a wind exclusion. Then Katrina happened immediately before Coastal could do anything to get coverage. MS SC said you cant deny coverage based on the future terms of the policy forms that don't exist yet. And you cant say "look at our past dealings and deny coverage" either because Coastal was going from a specified peril to an all risk policy. Finally, you can't say the wind exclusion on the binder is determinative because its ambiguous and you construe against the drafter. Note: - The parties were not as sophisticated here so you are more likely to construe against the drafter than in WTC

For insurance purposes, what does "use" of the vehicle mean?

"Use" of the Vehicle Farm Bureau v. Evans - claimants, in the back of a station wagon, in a field, decided to shoot fireworks, but they couldn't light them outside due to wind, so they lit them inside while the vehicle was still - did use of the covered vehicle as shelter come within coverage? "Use" means "natural and reasonable incident or consequence of the use of the vehicle involved for the purposes shown by the declarations of the policy though not foreseen nor expected." General Rule: "arising out of the use" of the covered vehicle requires finding of some causal connection or relation between the use of the vehicle and the injury. An injury does not arise out of the use of a vehicle within the meaning of coverage if it is caused by some intervening cause not identifiable with normal ownership, maintenance and use of the vehicle and injury complained of. (broader than proximate cause) Throwing trash out the window would meet the test, for example, but throwing an explosive device out the window would not. In this case, the "use" of the vehicle did not contribute to the injury causally any more than shooting her with a gun would have. Notes: Use Tests - Proximate Cause Test - Nexus Test (broader) (Evans Test) use of vehicle had causal contribution to injuries - Transportational Function Test - Vehicle Must be actively involved in producing the injury test

How does Medicare affect coordination of coverage of health insurance; how does the right of subrogation affect health insurance?

Coordination of Coverage Harris Corp v. Humana Health - congress made Medicare coverage secondary to any coverage provided by private coverage provided by private insurance companies. Insurance provided for a current employee makes the coverage primary; coverage provided to someone as an inactive former employee, though, allows the insurer to make itself a secondary payor to medicare, under the MSP statute. Therefore, the primary insurer could not recover costs against Medicare for money spent on its insured who was also enrolled in medicare. You can recover double damages as an insurer against a carrier who had a duty to pay the cost of medicare but did not as the primary insurer. The insurers, then, were one primary and one secondary under the MSP statute in this case. The secondary argued that under the MSP, priority is not only rearranged between medicare and the private insurers, but also among the private insurers themselves. The court ruled that the MSP statute does NOT affect inter-insurer priority, and therefore, the secondary with regard to medicare was still primary with regard to the defendant insurance company, could not sue the defendant for double damages, and could recover nothing due to the two policies Coordination of Coverage Clauses (the plaintiff didn't have one but the defendant didn't, making the plaintiff primary.) Notes: - There are several rules for allocation of coverage: the policy covering the insured as the named beneficiary is primary, the policy with the earlier birthday, or the policy belonging to the husband even - the rules are wack Assocated Hospital Service v. Pustilnik - right of subrogation - You cannot sue someone, alleging your hospital bills as your actual damages, then turn around and tell the insurance company that the bill does not represent your actual damages, therefore their right to subrogation should be less than that amount - that would be having it both ways. The court assumed that the settlement made the plaintiff whole. So, when the injured insured sued his tortfeasors, proving his damages by his hospital bill, he was barred from asserting that the subrogation amount should be less than that amount since the insurer (complicated) did not actually pay that full amount. The same rule applies to settlement: the claimant cannot settle for a reasonable amount, then turn around and tell the subrogor that the actual value of the claim was more than the settlement amount. Notes: - remember from before where settling with a tortfeasors voids coverage unless the tortfeasors has notice of the right of subrogation. But in this kind of situation the insured has already received coverage. The insured's right here can only be protected by a rule of apportionment of recovery for the underlying tort. - A lot of states, perhaps a majority, have ruled against this case's holding, finding that the insured must have been "made whole" before the insurer can exercise a subrogation right to reimbursement. In other states, rights of subrogation are governed by statute. - ERISA governs employer provided health insurance benefit plans. When the plan is subject to ERISA, as most are, subrogation is made even more suspect because then the state rule may be preempted by the policy or plan may govern the right of subrogation. This subrogation is cloudy because it must be "equitable." Most circuit courts have held that the relief is not appropriate equitable relief unless the plaintiff has been "made whole" by a tort recovery unless the insurance policy makes it explicitly clear otherwise. Without all the extra stuff, there are three basic approaches, though: a. Conclusive presumption that the sum for which an insured settles always constitutes full compensation for all his losses b. Apportion with a pro-rata rule that pays the insurer a portion of the settlement equal to the proportion its payment to the insured bears to the insured's total losses. Loss of insured 100k, insured paid 20k, settled for 45k, then insurer gets 20%: 9k c. Make whole approach - provides more nearly full indemnity for the insured by reimbursing her first for her uninsured losses. The insurer would then be reimbursed out of any sums remaining, and the insured would take any left over. - The right of subrogation is either controlled by statute/contract, or asserted as an equitable right. When subrogation is asserted as a right in equity, then you definitely cannot collect until the insured is made whole. This prevents unjust enrichment, but the "common fund" doctrine may require the insurer to pay a portion of the insured's attorney and court fees. When the insurer is coming under a theory of the policy/contract, though, the insurer often contracts out of the made whole rule and gives itself top priority. Insurers often also contract out of the common fund doctrine. Still other subrogation rules come from statutes. Thursday: practice test, bad faith 442-454, supplemental case

Can failure to give notice void liability insurance?

Notice Conditions Mighty Midgets v. Centennial Ins - the insured is to give notice of the occurrence of an accident as soon as "practicable", and the court ruled that giving notice seven and a half months after learning of the event met that requirement. "Written notice shall be given by or for the INSURED to the company or any of its authorized agents as soon as practicable" and Notice to any agent shall not effect a waiver or a change in any part of this policy or estop the company from asserting any right under the terms of this policy; nor shall the terms of this policy be waived or changed..." The question is what is reasonable under the facts and circumstances. Important in this case was the insurance company's and its agent's conduct and representations to the insured. The insured genuinely believed, misguidedly, that all the notice that was required had been given to the agent who sold them the policy. There was no suggestion of improper motive. Notes: - Waiver - to me didn't seem to be an issue here - Reasonable Delay -most courts hold that even policy provisions requiring immediate notice are complied with when notice is given within a reasonable time. The amount varies. The majority rule is that even an unreasonable delay does not breach the policy so long as the insurer suffers no prejudice as a result of the delay. Some courts also require the delay be in good faith. - Notice of Claim vs. Notice of Occurrence - the issue in Midgets was notice of Occurrence, but the insured is also obligated to provide notice of any claim or suit. Most policies require both. Even policies that require "immediate notice" courts usually apply the reasonable notice approach. Questions may arise about who the notice was given to or what kind of notice. - Late Notice by Insurer - an unreasonable delay by insurer may waive right to deny coverage West Bay Exploration v. AIG - for an insurer to be released from liability, there must be a failure to give notice within a reasonable time and there must also be prejudice to the insurer. The burden to show prejudice is on the insurer. Prejudice is found where the delay "materially" impairs an insurer's ability to contest its liability to an insured or third party. (Not but for cause test). The trial court was correct to find the three insurance companies were prejudiced when it took the insured two years to notify them after notice to it from the government that it was being required to perform toxic cleanup. By destroying "drip barrels", the plaintiff materially compromised the defendant's ability to present evidence that they are not liable, and to investigate the facts. The delay also made cleanup potentially more costly, which hurts the insurance companies if they are liable. Additionally, the plaintiff's delay was motivated by intent to avoid an increase in policy premiums. Lots of little things added up in this case, resulting in the court ruling in favor of the insurance companies. In the end, the insurance company didn't have to prove they would have won; they only had to prove "material" impairment. The question of prejudice is a question of fact. It was hard to say whether the cleanup would have actually been cheaper, but by giving late notice, the plaintiff deprived the insurers a chance to find out. Notes: - Burden of Proof - the rule that prejudice is required in addition to undue delay is a majority one

What is the relationship between your primary and excess insurance carrier when you are sued above the primary policy limit?

Relations Between Primary and Excess Insurers Guidant v. ___ - Most jurisdictions say that just like in other forms of insurance, when the carrier pays a claim on behalf of the insured, it has the right of subrogation to go after someone that you would have had a right to go after. The primary insurer has a legal duty to make an honest evaluation of a settlement offer within the total policy limits and may sue the excess insurer for contribution if the settlement is reasonable. So the primary has a claim against the excess for contribution when the primary settles for more than the primary policy limit. Duty to Settle Commercial Union Assurance Companies v. Safeway Stores - Safeway had 50k in insurance from Travelers, insured itself from 50k to 100k, and had 100k excess insurance from Commercial. When Safeway was offered a settlement within its self-insurance limits, refused, and got a judgment of 125k, the court ruled that the insured does not have a corresponding duty to settle like its insurers do. But, based on a theory of equitable subrogation rather than contractual good faith, an insurer has a duty to settle within its policy limits when it knows that an excess insurer has a high risk of exposure. There is, however, no corresponding duty in the insured to settle within the primary policy limits, but there is a mere recognition that the insured's status is not a license for it to engage in unconscionable acts which would subvert the legitimate rights and expectations of the excess insurance carrier. Therefore, the court ruled that a policy for excess coverage imposes no duty on the insured to accept a settlement offer which would avoid exposing the insurer to liability. (If an insured and the primary jointly agree to reject a settlement, the excess carrier has no right to subrogation) Notes: - Generally, a primary insurer has a duty to the insured to accept reasonable settlements, which may be enforced by the excess insurer in a subrogation action. (Equitable subrogation) - But where the failure to settle never results in personal loss to the insured, at least one court ruled that the excess insurer had no right - The traditional rule is that the primary has the sole duty to defend, but some courts hold the excess liable for pro-rata shares of the cost Drop-Down Liability Mission National v. Duke Transportation - none of the claimant's arguments persuaded the court that the excess carrier should have to cover the insured's losses when the primary insurer covered the loss could not pay - insolvent. The excess carrier does not "drop down" and assume the duty of the primary to pay when the primary is insolvent but there was coverage for which it was liable; rather, such coverage only exists when the policy contains qualifying language, such as "collectible" or "recoverable." It's not meant to normally be insurance on your insurance. Notes: - The issue usually turns on the language of the policy - The way the jurisdiction rules determines who has a motive to monitor the solvency of the primary carrier - Underlying coverage need not be exhausted by payment of its full policy limits to trigger the excess policy. Rather, the insured's settlement with the underlying insurer for less than its policy limits would trigger the excess policy. So goes the majority rule. - Follow-Form vs. Stand Alone Excess Coverage Follow form completely follows the insurance provided by the primary carrier Stand Alone - you have your own policy with the excess carrier. Umbrella - mixed, in that it provides excess for some types of coverage, but may be primary for other kinds of coverage.

Property Insurance: when can causation void coverage?

State Farm Fire and Casualty v. Bongen - plaintiffs' home was destroyed by a mudslide caused by negligent construction workers. The insurance company denied coverage based on a clause that said damage caused by earth movement is excluded, regardless of the cause of the event. There are at least two possible rules here. Majority Rule: Most courts hold these types of causation exclusions enforceable: when a loss is caused by a combination of covered and excluded perils, the insurance company can enforce the exclusion if the exclusion states that such a loss is not covered. Minority Rule: Some courts hold that causation exclusions are not enforceable when the "efficient proximate cause" of the loss was a covered peril, even if the loss was caused by a combination of excluded losses and covered losses - policy exclusions stating otherwise be damned. This court followed the majority rule, and thus the insurance company was allowed to enforce the exclusion. Notes: - "efficient proximate cause" means the dominant cause as between the two contributing causes of the loss. So, for this rule to take effect, one of the causes of loss must be the proximate cause of loss. If they are equal, there is no dominant/efficient cause - Another kind of causation clause in contracts is called an "Ensuing Loss" provision. An Ensuing Loss Clause provides: where an uninsured risk causes an insured risk, you are covered for the damage caused by the insured risk but not the uninsured risk, even though the insured risk was caused by an uninsured risk. These provisions say certain "ensuing" losses are covered if caused by insured risks, even if the ensuing loss was itself caused by an uninsured peril: ie, wear and tear causing fire damage. Uninsured risk -> insured risk -> coverage for the insured risk. Another example: a rusty pipe is excluded as wear and tear, but when it bursts and floods your basement, you may still be covered for the water damage (but not the cost to get new pipes); Or an earthquake which damages your house and starts a fire - an ensuing loss clause would mean you are not covered for the earth damage, but are covered for the fire damage. - If a motorist has collision but not comprehensive coverage on her car, which catches fire then runs into another car, the dominant rule would ask whether the fire is the proximate cause and deny coverage if it is, but it may be a question of fact for the jury whether the fire was the proximate cause or a concurrent cause Liristis v. American Family Mutual - Mold injured the plaintiffs after a fire caused damage to their house. The fire was covered and repairs were paid for by the insurance company, but mold soon began to grow after the repairs. It was unclear whether the mold in the new roof was caused by water sprayed onto the house to put out the fire or by water leaking through the faulty repairs. The parties agreed that mold could be both a cause of loss and a loss itself, but disagreed over coverage because the policy had an exclusion for mold. The exclusion said that loss caused by mold was not covered, but plaintiffs countered that mold didn't cause loss, but rather was the loss. The court agreed. (ambiguity?) therefore, if the plaintiffs can prove at trial that the moss was CAUSED by the fire, they can recover since fire is a covered peril. So, an excluded risk may itself be damage caused by an insured risk, and thus covered. This will usually be an issue of fact. Notes: - Noscitur a sociss - ascertain the meaning of doubtful words by referring to the meaning of accompanying words - Ejusdem generis - when a general term follows specific terms, the general term is interpreted as of the same class or type as the specific terms - Generally, an exception to an exclusion does not bring something within coverage if there is another applicable exclusion. For example: A is excluded, except for exception B, but while the loss would fit the B exception, there is another exclusion, C, which still applies to the loss, so the loss is still not covered. Another possibly ambiguous scenario is where instead of C being an exclusion, C is additional coverage in certain situations (ie instead of saying "you are covered for collapse. Exclusion: dry rot" it says, "you are covered for collapse caused by termites") - An ACC (anti-concurrent cause) clause's location within the policy can affect whether there is coverage. Read 251-273 and the Corbin Case (TWENN) Leonard - the court recognized three categories of damage: exclusive wind damage, exclusive water damage, and damage caused by wind concurrently or in any sequence with water. Wind damage was covered but if a flood came along and destroyed the house completely, no coverage. Broussard v. State Farm Fire and Casualty - the plaintiff has the burden of proof to show that the damage to his property is a named peril under a policy for insurance. When the plaintiff claimed he was covered under a named peril policy, it was error to say the defendant carried the burden to show that it was flood damage rather than wind damage which destroyed plaintiff's house. Even under an open peril insurance policy, the plaintiff still has the loss was direct and physical, although in either case the insurer bears the burden of proving a particular peril falls within a policy exclusion. Stipulation that personal property was destroyed was not stipulation that it was caused by wind. Broussard still bore the burden of proof. Further, expert testimony by the insurance company sufficiently proved that the damage to the home was caused by flood, an excluded peril. The stipulation does not matter because the plaintiff has the burden to show his loss was caused by a covered peril: even on an open peril, you have to show a direct physical loss. Defendant argued that the burden should shift back to the plaintiff once the defendant has shown flood damage. The court disagreed, saying the burden was on the insurer to show how much of the damage was caused by storm surge. (So it was not up to the insured to prove he deserved any recovery, but rather, up to the insurer to prove how little the insured loss contributed.) The defendant did lack an arguable basis for continuing to deny the wind damage claim, making it liable for extra-contractual/ consequential damages. Unlike Leonard, this court said the ACC clause does not operate to avoid coverage for wind damage caused right before flood damage that would leave only a slab. Corban v. USAA - Broussard's Erie guess wasn't right: insurance vests at the time of the damage, so when an insured like in Broussard has wind insurance and a water exclusion, and the wind comes first and the water comes later, the damage caused by the wind is covered regardless of the language of the exclusion, ie, "we cover no damage which would not have occurred but for an excluded cause" - too bad. The ACC clause is aimed only at JOINT, CONCURRENT perils that happen together to cause damage. Where the damage is separate and distinct, the acc clause does not get rid of coverage that vests at the time of the covered peril. So if wind comes along and damages you, then a flood does after, you are covered for the wind damage even if the storm surge would have wiped you out. The acc clause only avoids coverage when the two happen indivisibly, together, concurrently. Coverage vests at the time of damage. Unfortunately the case gets confusing from here. "In any sequence.." language cannot be used to divest the insured of right to indemnity for a covered loss, so the ACC clause applies only if covered and excluded perils contemporaneously converge, operating in conjunction to cause damage. This language conflicts with the doctrine of sequential causes over time creating a loss. (the mudslide case, which was meant to be excluded). So they should have just left the in any sequence language discussion out of their opinion. The purpose of the ACC is to exclude loss caused indivisibly by concurrently acting causes where one cause is excluded and one is covered. The "in any sequence" language is meant to exclude situations like the negligence -> mudslide case. In that case, the damage would be indivisible. So, the debate over "in any sequence" is unnecessary. (ACC clauses do not apply to jurisdictions that use the proximate/efficient cause rule. But in states like MS, the majority, ACC clauses will be enforced when unambiguous. And sequential clauses would probably also be enforced in situations different from this one. There wasn't any reason for the court to bring up sequential clauses.) Hoover v. USAA - insurer determined that most of the damage to the home was caused by storm surge rather than wind. Plaintiff sued on the policy and bad faith etc. at trial, directed verdict for USAA. The lower court ruled that the plaintiff failed to show that any of the damage to the lower part of the house suffered any wind damage. He let it go to the jury on the issue of the wind damage to the roof. On appeal, the plaintiff argued that the burden of proving damage on an open policy is on the defendant insurer. The dissent from the majority agreeing argued that the trial court didn't switch the burden - rather, the plaintiff failed to provide any evidence whatsoever about the damage to the house from wind - only arguing damage to the roof. If the only evidence introduced was evidence by the defendant - how could a reasonable jury decide otherwise?