Insurance Percy Spring 2012 BOOM

7/28/2019 Insurance Percy Spring 2012 BOOM

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Laurel99

INTRODUCTION TO INSURANCE Types of Insurance

First party vs. third party insuranceo Third party is essentially liability insurance. Insured might have to pay damages to P in tort lawsuit.

Commercial liability, med mal, etc. First party, example, house is fired by fire and you collect under your homeowners policy. The insured is the

one that is damaged. Collision, etc.o

Homeowners first party, something happens to your property. Also liability part of coverage, coversthe insured for liability claims.o Auto first: collision and comprehensive. Comprehensive, damage to car. Liability. And then

uninsured motorist. Types

o Property/Casualtyo Lines of Insurance medical malpractice, products liability, homeowners, multiple peril, commercial

property insurance, commercial liability insurance, autoo Life, health, and disabilityo Group vs. individual

Group i.e., State of MS health insurance. Lots of health is group. Individual auto, umbrella policy.

o Reinsurance When an insurance company, they sell insurance and will purchase reinsurance from an

reinsurer, will obligate reinsurer if first company is obligated.o Excess Insurance

Lots of commercial entities will buy layers of coverage. Primary insurers duty to defend. Excess in addition to primary, only pay if judgment or settlement above limit on primary.

Types of Insurerso Stock companies

Owned by shareholderso Mutual companies

Owned by policyholders Mutual companies dont have to generate a profit for shareholders, in regular corporations,

shareholders will want dividends. Doesnt make much of difference otherwise.o Lloyds of London

Different insurers insure a percentage of risk. Underwrite percentage.o Government as insurer

Medicare, Medicaid, federal crop, federal flood (all flood insurance is sold through the federalflood program, but private companies may sell).

Functions of Insurance

Risk Transfero Liability insurance, transferring risk to liability insurance company that you might be sued and have to

pay.o 1% chance of suffering a $10,000 loss

Expected loss = $100 A lot of people would transfer the risk of this loss rather than the second.

o 10% chance of suffering a $1,000 loss Expected loss = $100

o A risk neutral person would treat these risks the same. A risk averse person would prefer the latterrisk and might pay $105, $110, or even more to obtain insurance to transfer the latter risk.

Risk Poolingo Larger the pool is, the more certain the insurance company can be that it has guessed right. Variant

is not going to be as great the larger the number of people insured.o By insuring many insureds, an insurance company can more accurately predict the risks involved.

Thus, by pooling a large # of insureds, an insurer can reduce the cost of insurance to each insured.For example, it might cost $110 to transfer a $100 risk to a company that insures 1,000 policyholders,but only cost $105 to transfer the risk to an insurance company that insures 2,000. Pooled risks thatare independent are the ones that reduce risk.


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Risk Allocationo Insurance companies try to figure out what risks you pose so they can charge you the right premium.o Risk allocation refers to the insurers attempt to classify the risk posed by the insured and to price the

coverage accordingly.o Problems Caused by Imperfect Information

Adverse selection Insured know they pose a higher risk than the insurance co. believes. Or think you are getting a bad deal. Would drop out of the pool. As low risk people

drop out of pool, higher risk people left, so will have to keep raising premiums, andlow risk people will keep dropping out.

Want insurance co. to be able to allocate risk appropriately. If higher risk, want them to be solvent enough to pay when you have a claim. Could be that co. has more info than you do. I.e. know the chance your house is

going to burn down. Know more about general risks. Moral hazard

Used to refer to someone intentionally causing a loss that was covered. Insurance has tried to combat by requiring an insurable interest. Modern kind of moral hazard, fear that b/c you have insurance, you wont be careful

as you might be. B/c you know you have insurance, might be a little more negligent. Products liability might be a little more risky in design of a product b/c you have

liability insurance. How do insurance companies deal with these policies? Methods of Addressing Adverse

Selection and Moral Hazard Lengthy application/screening process to determine the degree of risk and to screen

out those who pose too much risk. Classify insureds according to risk and set premiums accordingly. Experience rate when policy is renewed. Deductibles, co-insurance, co-pays

If you have to pay, less likely to abuse your insurance or consume more thanyou need.

Coverage limits You will be risk averse at some level.

Require insurable interest Cover unusual risk separately or exclude them

Skydiver, pilot

Earthquake, b/c not independent risk. Hard to calculate.o Healthcare reform

One provision cant exclude coverage for preexisting conditions. In the absence, why would they exclude coverage for preexisting conditions?

Adverse selection problem. Gives people the incentive to opt-in at any time, whywould you buy coverage now when you could get it in 30 years when you get sick?Not transferring a risk, transferring a known risk. But they will charge more.

Individual mandate if you make everyone buy insurance now, cant have adverse selection.Also in reform. Judges have said these two go together. So if everyone has to buy today,people cant adversely select.

Breach of Warranty Common Law Rule CL Rule any breach by insured voids coverage.

o Were not required to prove breach of the warranty led to the loss.

Judicial Methods of Mitigating Harsh Effects of the Ruleo Treat as representation insurer must prove materialo Treat as affirmative rather than promissory

Affirmative what is true on the day K is made Promissory warrant that it will always be true

o Contra proferentum (construed against drafter) Legislative Regulations treat warranty as representation

o Breach voids policy only if it is material Different tests for materiality

Breach caused or contributed to loss Breach increased risk


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Even if die in a car wreck and you lied about smoking, breach still increasedthe risk.

Misrepresentation was fraudulent (some states) Even if it doesnt increase risk In other states, intent doesnt matter, so even if innocent misrepresentation, if

material, then breach. State statutes not uniform. Could define materiality as any of the above.

Vlastoso The court said affirmatory, not promissory. Relevant date is date policy is issued, not the date of the

fire.o Could require a promissory warranty, but language has to be clear.o Two reasonable interpretations. Warranted that it was a janitors residence only or that was a janitors

residence but could have other stuff. When two reasonable interpretations, the insured wins.The Transformation of Warranty Law

Misrepresentationo Most jurisdictions: if a term is a representation, the representation must be material in order to void

coverage.o To void coverage, insurer must prove:

1. The insured made a false/misleading statement 2. That was material 3. That induced justifiable reliance 4. That caused insurer damage

o False Statement Statement is not false as long as it is substantially true Majority Rule intent is not relevant unless it is a statement of opinion

If intent is required, will make everyones costs go up. So majority doesnt require a fraudulent misrepresentation, the risk of a good faith

misrepresentation is on the insured. Minority Rule intent is always relevant, whether fact or opinion

o Materiality When is a representation material? Varies by jurisdiction:

1. If it contributed to the loss OR 2. If it increased the risk OR 3. If disclosed, the insurer would have denied coverage OR 4. If disclosed, the insurer would have either charged a higher premium or offered

less coverage

POV majority objective is this a fact that would be reasonably material to an insurer inthis line of business?

Even if subjective standard 99% of things that are relevant to one insurer will bematerial to all insurers.

o Justifiable Reliance Closely related to materiality b/c insurers arent going to rely on immaterial representations. Prevents insurer from voiding policy if they knew that the representation was false.

Neill v. Nationwide Mutual Fire Insurance Company If insured answers agents truthfully but agent makes misrepresentation, insurer cannot rely on

misrepresentation unless insured engaged in fraud or collusion with agent.o Absent fraud or collusion agents knowledge is commuted to the insurance co. and since they know

the answer, cant rely.o If agent tells you its immaterial, no reason to doubt the agent.

Duty to read application?o Most courts will take a similar position to the one taken in this case, even if signed and

misrepresentation in application, not dispositive. Jury could still find that the insured wasntresponsible for misrepresentation. Some courts will be more conservative.

Concealment/Duty to Disclose Should you have an affirmative duty to disclose if they dont ask and you know it is material?

o Common Law had a duty and could void coverage. Applicant knew a fact to be material and failed to disclose it.

o Modern Rule not fair. So relaxed standard. If they dont ask, led to believe that not material. Wary ofinsurers argument that you knew it was material and didnt disclose. Insurers should be in the


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business of knowing what questions to ask. Mackenzie v. Prudential Insurance Company of America

o Duty to disclose if one of your answers is not untrue but was when you made it.o Here the policy has a provision, so that might be relevant.

No insurance will take effect unless all of the answerscontinue to be true and completeanswers as of the date of the delivery of the policy.

o Duty to correct earlier response even though true when made and now no longer true. In mostjurisdictions, duty to disclose even if no language in policy.

o Do you have to disclose after you receive the policy?????? If there is a change and an answerbecomes untrue???

Standardized Forms Why is it arguable necessary for property and casualty insurance to use standard form? Super-

standardization gives insurance companies the ability to stay solvento Useful to have claim loss data from a bigger risk poolo Creates some benefitso A lot of times, not really shopping based on policy, really for price and probably service.

Pros:o Consumers can make price comparisonso Standardized language is more precise/clear; meaning and application more consistent and

predictable. Great uniformity across states. Can use other jurisdictions interpretation to showmeaning.

o Makes it possible to pool claim data.o Pooled data enhances insurers ability to maintain solvency.

Cons:o Difficult to buy customized coverage

Can sort of customize but even customization is standardized b/c you buy standardendorsements.

o Anti-competitive effect on substances and pricingo Discourages innovation

Contract of adhesion so construed against the drafter. Principles of Interpretation

Coverage provisions interpreted broadly. Exclusions interpreted narrowly. Same terms in different parts of the policy interpreted in same fashion. Terms given ordinary meaning, not hyper-technical meaning. Contra Proferentum: ambiguity construed against the drafter. Limited by reasonable expectations of the insured.

Construing Ambiguities Against the Drafter/Insurer Contra Proferentum

o A provision is ambiguous when it is subject to two reasonable interpretations. If two reasonableinterpretations construed against the drafter.

o Dont have to show you thought it meant one thing, just that there is an ambiguity. World Trade Center v. Hartford

3.5 billion coverage per occurrence no policy to look at, look at the binder Travelers form didnt define occurrence, however WilProp form defined it to mean all losses or damages that

are attributable directly or indirectly to one cause or to one series of similar causes

Silverstein: occurrence in Travelers binder is not ambiguous because it is clearly defined under NY law Reasonable Expectations of the Insured

Majority Rule Weaker Formo Reasonable expectations doctrine may only be applied when the K contains some kind of ambiguity.o Construe against drafter when ambiguity when consistent with reasonable expectations of the

insured. Have to have an ambiguity. Minority Rule Strong Form

o Even if a policy is not ambiguous, objective reasonable expectations of the insured must be satisfied. We dont care what policy says, even if unambiguous, we will cover the reasonable

expectations of the insured.o Burden on insurer to clearly communication coverage and exclusions.


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o Insurance company has to use clear, unambiguous language AND dispel any reasonableexpectations of the insured.

o Atwood case. (electrician) Issues

o Typically, want to ask: is this the type of insurance most of the people would want and would be wilingto pay for it?

o Requirement of insured saying: I thought I was covered? Not in most cases. Courts just look at what a RP would think.

o Also, when looking at reasonable expectations, courts protect consumers. They might treatsophisticated buyers differently.

o Atwater Creamery Company v. Western National Mutual Insurance Company Forcible entry requirement in burglary insurance policy. No ambiguity. Court says they should get coverage reasonable expectations of insured. Why would you

buy a policy that covered sloppy burglars and not sophisticated ones? Other courts look at purpose if there is evidence that it was not an inside job, they would be

serving the purpose of the definition by giving coverage. This court rejects that approach.

Burden on insurer to clearly communicate coverage and exclusions. When a Court Uses Reasonable Expectations Test

o It applies to that particular policy language in that state.o As a matter of law, when this language is used, this is what the policies mean because of reasonable

expectations of insureds. The Role of Intermediaries

Why would you use an agent?o To some extent they provide service on the front end and when you make a claim.

Agentso Exclusive

i.e. an exclusive agent for State Farm. Only work for State Farm. Will be able to give serviceabout what kind of insurance you need, etc.

o Independent Dont have an exclusive relationship with one agent.

o Get paid based on commission, i.e. a percentage of your premium.o Hired and paid for by the insurance company. They do owe a duty to applicant insured but work for

insurance company. Brokers

o Hired by the insured.o Typically, hired by more sophisticated insureds to get sophisticated or difficult to find coverage.

Employers/Group Insuranceo Esp. with healthcare, it is provided by an employer.o In some instances, they will be deemed you agent.

If they give bad advice like you can opt-in here, etc. may be deemed to be an agent of theinsurance company so not estopped from giving you coverage.

ERISA pretty much preempts any state law that relates to an ERISA plan. So to the extentthese agent relationships are controlled by state law, might be displaced if you plan is anERISA plan.

When will insurer be bound by independent agent?o Actual and Apparent Authority

Actualo Express

K may say agent has authority to bind coverage.o Implied

Insurer acts in such a way through its relations with agent. Might ratify coverage that agentshouldnt have bound. Course of conduct.

Apparento Insured must show something insurer did to create apparent authority on the part of the agent.o Essentially saying, I thought the agent had authority.o What kinds of things could be relevant?

Tell you youre covered, etc. About the appearance of authority to the insured.


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How can insurers protect themselves despite apparent authority?o If agency did have apparent authority, the insurance company ends up paying for the coverage.o But they can get indemnification from agent because no actual authority, express or implied.

Insured still gets coverage. Agent may still argue implied actual authority.

o Not a whole lot insurance companies can do to dispel apparent authority. An insured is going to think an agent has authority to give them coverage.

o Best bet is to make sure they can pay indemnification claim if they exceed actual authority. Require bond, require them to be solvent.

Not without cost, will make everyones insurance go up.o Could try to make sure no apparent authority by putting big words on application that says agent

doesnt have actual authority to bind these certain things. Claims Against Insurer Based on Agents Conduct

1. Insurer is liable because agent bound coverage (actual or apparent authority). 2. Waiver: intentional relinquishment of known right

o Insurer is liable because agent or insurer waived requirement (such as file proof of loss w/in 60 days)o Clear requirement in policy but the agent says dont worry well give you six months to file. Argument

is that agent waived that requirement.o Can an insurer disclaim an agents authority to alter and/or waive policy language? Can inhibit your

ability to argue waiver and estoppel. Some courts enforce limitations even when the insured did not read it Other courts refuse to enforce such limitations Other courts will enforce limitations with respect to coverage provisions but not with respect

to provisions relating to claim proceedingo Whether there has been a waiver is usually a question of fact.

3. Estoppelo An agent made some misrepresentation and you detrimentally relied.o Rules

Majority estoppel cannot be used to create coverage that never existed or is excluded inthe policy

So how can it be used? If for instance, an agent tells you that you have 6 months to file a claim but you really

on have 60 days. You wait and filed 5 months later. Could use estoppel. Minority estoppel can be used to create coverage if there was a misrepresentation and

reasonable reliance before or at the inception of the K. No estoppel for post-loss statements by agent under either rule.

Insureds Claim Against Agent 1. Negligent Failure to Procure Coverage

o Failure to obtain coverage OR failure to notify of possible coverageo Agents duty is to act as a reasonable agent

Unless agent holds himself out as being experto Must prove: duty, breach, causation, damages

Duty and breach usually need an experto Causation

Bound by the limitations on the market. Have to show that the coverage is available on themarket. And you would have gotten it.

2. Breach of K to Procure Coverageo Failed to get coverage promised by agent. Here, doesnt matter if coverage was available or not.

They made a promise and they broke it, that is all that is required for a K claim.

FIRE & PROPERTY INSURANCE pg 195 for policy Standard Homeowners Policy First Party Property Insurance

Declarations page. Almost all policies will have this.o Named insured, policy period, coverage, limits, premiums, residence insured, policy #.o Coverage (here):

Section I Dwelling Other structures


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Personal property Loss of use

Section II Personal liability: each occurrence Medical payments to others: each person Will tell you the amounts and usually the amount of the deductible.

o Declarations page should also list any special endorsements, i.e. you bought more for jewelry, etc. Then agreement

o Really not the coverage language. Some generic promise to pay. Promise to provide coverage. Definitions section

o Will always see one either at beginning or end of policy.o This one defines you, your, insured, bodily injury, occurrence, property damage, etc.

Deductible section Coverages

o Coverage A dwellingo Coverage B other structureso Coverage C personal propertyo Coverage D loss of useo Coverage E additional (debris removal, credit card theft, additional cost to rebuild due to

ordinance/law, etc.) Perils Insured Against

o Coverage A and Coverage B We insure against risk of direct physical loss to property described in Coverages A and B That is what to look to see if you are covered for your claim. All risk, doesnt delineate specific things it covers. Then says we do not insure however, for:

Usually intrinsic things. Things you expect. And then a whole # of exclusions on page 205. Coverages A and B: all risk v. specified risk, dont cover mold, wear and tear, pollution, etc.

o Ensuing loss cause Under 2.b and c above, any ensuing loss to property described in coverages A and B not

precluded by any other provision in this policy is covered. Might cover damages for an ensuing loss that is caused by a precluded peril.

o Coverage C (named peril) Personal Property

Have to show my personal property was damaged by one of these specific perilso Exclusions

Ordinance or law, earth movement, water damage, neglect, war, intentional loss Neglect not if you leave the coffee pot on and your house burns down. More like, your roof

gets blown off and you do nothing and you continue to let rain pour in and damage property.Neglect means neglect of an insured to use all reasonable means to save and preserveproperty at and after the time of a loss.

At beginning of exclusions If two perils combine to cause a loss and one is covered but the other isnt, it is

excluded, whether they combine at same time or separate times. Anti-concurrent losses clause.

B. We do not insure for loss to property described in Coverages A and B caused by any ofthe following. However, any ensuing loss to property described in coverages A and B notprecluded by any other provision in this policy is covered.

2. Acts or decisions, including the failure to act or decide, of any person, group,organization, or governmental body.

Very broad.o Conditions

Insurable interest Notice and proof of loss

Have to be able to show what you lost Loss settlement

How much you get paid Coinsurance provision Coordination of coverage other insurance


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Here, pro rata by limits Mortgage clause

Have to name mortagee if the bank makes you buy homeowners. So if homeownerintentionally burns house down then bank can still recover.

Policy period Policy applies to loss which occurs during period

Section II Liability Coverageso If a claim is made or a suit is brought against an insured for damages b/c of bodily injury or property

damage caused by an occurrence to which the coverage applies we will:o Cancellation (in Sections I and II conditions)o Subrogation (in Sections I and II conditions)

Those are provisions that you need to be aware of. Some particular to property insurance, but most for allkinds of insurance.

The Requirement of an Insurable Interest Why Require an Insurable Interest?

o Combat moral hazardo Prevent gambling/wageringo Also, the principle of indemnity. Dont want insureds getting windfalls. They should be restored but not

made any better b/c if not risk of moral hazard. Insured should not profit from loss. Insurance protects insured from suffering a loss; it does not serve to create an opportunity for

gain. Richard C. Gossett and Margaret D. Gossett v. Farmers Insurance Company of Washington

o Gossetts located unfinished home to buy, complete and sell, signed K with owner to obtain financingwithin 30 days. Gossets approach Trusty Deed for financing. Trusty Deed agrees to try to obtainfinancing for a fee of 5% of the loan. Gossetts speak with insurance agent, tell him they would beowners, obtain poicy listing them as the insureds and Trusty Deed as the mortgagee. Gosettsassigned all of their interest in the purchase agreement to Trusty Deed and indicated

o Statute insurable interest is any lawful and substantial economic interest in the safety orpreservation of the subject of insurance free from loss, destruction, or pecuniary damage.

o Court: It doesnt matter that they paid premiums. Expectation of profit not enough Also, had no lease and not even an option to buy. No coverage for loss of expected future profits No insurable interests

They do have insurable interest in improvements. Limited to value of improvements, not value of entire house. No legal interest in continued possession.

Insurable interest is determined at the time the loss occurso For life insurance, its when you buy the policy.

Insurable Interest Testso Legal or Equitable Interest in the Property

Fee simple, life tenant, remainder man, equitable lien Usually not options

o Factual Expectancy Expectation of economic advantage if insured property continues to exist Expectation of economic loss if insured property is damaged Some jurisdictions recognize factual expectancy while others do not

o Contractual Rights Secured creditor has interest in security (deed, title, security interest, mechanics lien, etc.)

o Legal Liability If insured has legal liability for destruction of somebody elses property or for breach of

promise to procure insurance. (promise to procure insurance on property sold subject toconditional sales contract and later transferred to third party supports insurable interest inseller).

o Sample H.O. Policy Section 1 Conditions

A. Someone other than the owner of a home, such as a secured creditor (a bank),may have an insurable interest.


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Trigger and Occurrence Issues Sample Policy Coverage A & B Dwelling and Other Structures

o Section I Perils Insured Against We insure against risk of direct physical loss to property.

Property damage means physical injury to, destruction of, or loss of use of tangibleproperty.

Tangible v. Intangible Propertyo Section I Conditions

The policy applies to loss which occurs during the policy period. Occurrence means an accident, including continuous or repeated exposure to

substantially the same general harmful conditions, which results, during the policyperiod, in (a) bodily injury; or (b) property damage.

Courts generally will not allow recovery for event that is not fortuitous.o Port Authority of New York and New Jersey v. Affiliated FM Insurance Company

The mere presence of asbestos, without damage or loss, is not enough to trigger coverage. Ps must prove their structures were physically damaged in order to trigger coverage. Mere

presence of ACMs not enough. No loss of use, no coverage.

P did not lose use of building, asbestos did not interfere with use. If losses are progressive, which policy is triggered?

o The policy period during which loss was discovered or should have been discovered (manifestation) The policy in effect at the time property damage was discovered or should have been

discovered is the only one that will provide coverage. Courts generally follow and hold only one policy triggered even when other policies

were in effect at earlier times when the insured was unaware the damage wasoccurring.

o OR the policy period during which damage first occurred.o OR the policy period during which any damage actually occurred.o Examples of progressive losses

Progressive foundation damage; progressive asbestos contamination Business Interruption Coverage

Usually, covers economic loss when there has been:o 1. Damage to covered propertyo 2. Caused by a covered perilo 3. Resulting in a necessary (depending on the policy) interruption of business

Sometimes, complete cessation required.o 4. As a consequence of which there is a covered loss.o 5. Which occurs during the period of restoration of the business.

Not necessarily the same as policy period. Will be defined in policy, how long you get torecover for your lost income.

Business interruption coverage is a standard part of commercial property insurance. Only going to cover the loss as attributed to the covered peril.

o Does not insured against the risk of pure economic loss.o Sometimes, there is coverage if civil authority shuts down business even though there is no damage

to insured property. You get to recover the likely net income of the business. Insured does not get to take advantage of market

upswing. Contingent BI Coverage

o Covers the risk of suffering economic loss resulting from damage to certain other property, such as

property of suppliers and customers.o Non-covered property typically has to be damaged by covered peril.

Duane Reade, Inc. v. St. Pal Fire & Marine Insurance Companyo Insured: period of restoration = amount of time necessary to rebuild complex at WTC.

Pretty much forever.o Insurer: period of restoration = amount of time in which insured could have restored operations at

other locations. Nationwide to get back to pre-911 gross sales.

o How long the restorations period is determines how much you get.o Also an extended recovery period here.


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o Court: restoration period equals time it would take insured to rebuild/replace its WTC store at asuitable location. Otherwise, the Extended Recovery Period is rendered superfluous.

o Loss of Market Exclusion? Only excludes losses by changes in competition and shifts in demand. Not loss covered by physical destruction or covered peril.

o If a policy has two different periods you cant have a definition of the first that extends coverage to theend of the second one.

Compare:o 1) In determining the loss of earnings, due consideration shall be given to the earnings of the

business before the date of damage or destruction of its property and to the probable earningsthereafter, had no loss occurred.

A lot of people argued loss was ambiguous and if it only meant loss to their physical businessthen could have made more money, i.e. lumber company and Hurricane Katrina.

o 2) The amount of business income loss will be determined based on: (i) the net income of thebusiness before the direct physical loss or damage occurred; and (ii) the likely net income of thebusiness if no physical loss or damage had occurred, but not including any net income that wouldlikely have been earned as a result of an increase in the volume of the business due to favorableconditions caused by the impact of the covered cause of the loss on customers or on otherbusinesses.

This was a response to the above arguments. Exclusions

Purposeo Combat moral hazard

E.g. have to have insurable interest; not covered for neglect once loss occurs.o Limit adverse selectiono Avoid catastrophic losso Avoid duplication of coverage by different policies

In homeowners policy, liability for car wrecks excluded b/c you have to buy auto insurance. BOP

o Insurer had BOP to show that loss was caused by an excluded peril. Intrinsic Loss

o Policy only covers fortuitous losses caused by an external peril.o Policy may be all-risk but still requires a loss caused by an external force rather than an inherent

characteristic of the property.o Shouldnt be able to insure against a known risk.o Court in Chute said that this is such a strong public policy issue that even if a policy is silent, might

find the same way.o Exclusions in Sample Policy

Deteriorations, latent defect, inherent vice, wear and tear, etc.o See provisions in 6(a) and (b) on page 203

Imminent Collapse v. Actual Collapseo Why are insurers hesitant to provide coverage for imminent collapse?

Avoid coverage for intrinsic losso Language Makes a Difference

Risk of loss involving collapse v. Direct physical loss involving the sudden, entire collapse ofa building or any part of a building followed by definition of collapse. (Rosen)

We exclude coverage for collapse except for loss or damage caused by or resulting fromrisks of direct physical loss involving collapse of any building (doheny)

o Division of authority as to whether there is coverage when collapse is merely imminent.

o Sample Homeowners Policy Language providing for actual collapse, not imminent collapse. Collapse 8. a. (1) definition (b) collapse must be caused by 8(b) exception for collapse caused by decay that is hidden from view 6(c) exclusion for collapse caused by dry-rot The general rule is that you cannot use an exception to an exclusion where the loss is

excluded elsewhere.o Rosen v. State Farm

The Problem of Causation Anti-Concurrent Cause Clauses When more than one peril can be said to have caused or contributed to the loss, is there coverage when one

peril is covered and the other is excluded?


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o ACC language applies to the losses listed as excluded in that section.o If one of these things contributes at all it doesnt matter, the loss is excluded.

Efficient Proximate Cause Ruleo If a covered cause is the efficient proximate case of the loss, the loss is covered even if an excluded

event contributed. If you have one covered peril and one excluded peril and they combine concurrently or

sequentially to cause one indistinguishable loss then the loss is covered.o Some courts will not enforce the EPC rule where the ACC language expressly says otherwise.

When that is not the case, sometimes the court will enforce the EPC rule.o In the absence of K language addressing concurrent causation, many courts have adopted the EPC

rule.o MSSC allows insurer to K out of the EPC rule through ACC clauses.o State Farm v. Bongen

Home destroyed by a mudslide. Prior to this, the city had cleared area above home forconstruction which caused erosion and ground to weaken. And then mudslide.

Clear exclusion for mudslide damage earth movement exclusion. Typical for earth movement to be excluded, b/c catastrophic, so a bunch of claims. Not

independent. Policy excluded from coverage any loss resulting from earth movement, regardless of the

cause of the earth movement, and regardless of whether a non-excluded risk actedconcurrently or in any sequence with earth movement.

Court here went with majority rule an insurance company can contract out of the efficientproximate cause rule.

Percy: insureds should have made a reasonable expectations argument: Not consistent with reasonable expectations of coverage. Reading the policy would typically think that the exclusion was referring to

catastrophic loss, not something like this as the result of someones negligence. Mold Exclusion Liristis v. American Family Mutual Insurance Co.

o Here a fire and then water damage which caused mold.o Why not cover for mold?

Its intrinsic.o This is not intrinsic the mold came from the water damage b/c of the fire.o Court mold damage caused by a covered event is covered; losses caused by mold are excluded.

Loss caused by mold v. Mold as the losso Another Case

Covered for loss caused by frozen pipes. But exclusion for loss caused by mold.

Argument Mold caused by the pipes. Two perils, one covered, one excluded. Default rule is

EPC when no ACC clause.o Sample H.O. Policy

Attempts to exclude all mold. Ensuing Loss Clauses

Losses involving wear and tear and faulty design are not covered. But If wear and tear or faulty design resulted in fire damage to insured property, the loss

would be covered b/c the ensuing loss by fire is itself a covered peril. Katrina Leonard case

o Policy language Flood exclusion enforceable

Acc clause is ambiguous It does not exclude coverage for different damage caused by wind, . . even if the

wind damage occurred concurrently or in dequece with the excluded water damage.The wind damage is covered; the water is not

Weather condition exclusion is ambiguious The clause cannot be read to exclude wind damage that occurs at or near the time

that any excluded water damage occurs With respect to coverage A, insured has to prove direct physical loss to property With respect to cover

o Claims based on agents conduct No evidence of negligence


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Statement that leonard didnt need flood insurance was a statement of opinion; statements ofopinion cant give rise to misrepresentation claims. Leonards reliance on this claim wasntreasonable given policy language and the leonards admission that they were aware ofdiscussion of flood exclusion after hurricane George

Agent didnt altero 5

th Circuit opinion Under MS law, court determines whether there is ambiguity. A term or provision is ACC clause is not ambiguous and does not provide coverage for wind damage concurrently

with water Court says 3 types of damages: wind (covered), water, wind + water (excluded). MS law does not preclude insurers from contracting out of the efficient proximate clause rule

Katrina MS Supreme Court decision in Corbano Storm surge is within water/flood exclusiono Right to coverage/indemnity attaches when (at the time) a loss is sustained that is within coverage

This right will not be divested simply b/c something else happens later. Wind damage preceding water damage is covered even though storm surge that came after

would have caused the same damage.o In any sequence language was considered ambiguous will not exclude coverage for wind damage

even though it would not have occurred in the absence of flood damage.o P is covered for wind damage.o When wind (covered peril) and water (excluded peril) act together, at the same time, as one

indivisible force, ACC clause precludes coverage.o In other words, ACC clause only applies when you have indivisible damage that acted concurrently or

sequentially. Only indivisible loss caused by wind and water is excluded.

o With respect to coverages A and B, insured bears the burden of proving direct, physical loss and theburden shifts to the insurer to prove that the loss was caused by an excluded peril.

o Note: remember to pay attention to when and if loss attached. (right to coverage attaches when at thetime a loss is sustained that is within coverage)

Increased Risk Dynasty, Inc. v. Princeton Insurance Company

o Exclusion for increase in hazard: insurer not liable if hazard is increased by any means within thecontrol or knowledge of the insured.

Not standard language for H.O. policy but comes up with fire insurance.o Neither party disputes that the fire was the result of arson.

o Insurer claims that P increased the hazard by intentionally disabling the sprinkler system.o Court issue for the jury

Courts have mitigated the potentially harsh effects of the clause by:o Requiring knowledge and control

Or constructive knowledge and control Example: landlord-tenant

House burns down b/c tenants have a meth lab. Increase in risk b/c of metlab for more than an insignificant amount of time.

He would have to know there was a meth lab or he should have known(negligence).

Obviously, have control.o By narrowly construing who the insured is

One case, a low level employee turned sprinkler system off. Might have to be someone

higher up than that.o By requiring the increase in hazard to be substantial in time and/or magnitude

Casual, temporal changes generally do not amount to an increase in hazardo By treating the issue as one for the jury

Typical increase of risk cases are where property is put to a different use. Standard increased risk cases

o Risk has been materially and substantially changed over time.o Will forfeit your coverage.

What about putting warnings on your property that it is protected by spring loaded guns?o Fire-men are not coming to that fire. So a court has said that increases the risk.


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Appears more frequently in commercial properties. Vacant or Unoccupied Clauses

o Vacant means empty no furnitureo Unoccupied refers to if someone is living there.o Exclusions for damage caused by freezing pipes, etc. if property vacant or unoccupied for a specified

# of dayso Also, many policies provide general exclusions or conditions barring coverage if property was vacant

or unoccupied for a period of more tan 60 days at time of loss. Sample Policy For exam

Should be familiar with Coverage A, B, C Collapse Exclusions on pg. 203, mainly for intrinsic loss or wear and tear Basic grant of coverage on pg. 202 Ensuing loss clause, pg. 204, left-hand column

o If rust is wear and tear but an ensuing loss is otherwise covered you would otherwise come w/in it. Personal property named peril

o Have to prove caused by one of those 205 ACC cause With big exclusions we talked about Neglect

o Roof damage and dont do anything Intentional loss

Conditions on pg. 207 that tells you about how much you get Duties after loss pg. 207

o Tells you what you have to do Loss settlement pg. 207

o Personal property actual cash value at time of loss but not more than the amount required to repairor replace.

The Measure of Recovery Actual Cash Value Clause 2 Views of Indemnity

o Economic conception: to assure that insureds net worth is the same after the loss as it was beforeOR

o Functional conception: to return the insured to roughly the same style of life as he or she occupiedbefore the loss.

Tests for Actual Cash Value

o 1. Replacement/repair cost minus depreciationo 2. Fair Market Valueo 3. Broad Evidence Test

Permits consideration of all evidence that an expert would find relevant to a determination ofvalue.

Size, material, market value, etc. Express Replacement Cost Coverage

o Many policies provide insurance for the cost of replacement without deduction for depreciation. Such policies might require that this only applies when there is actual replacement

Otherwise, ACV will be paid. Valued Policy Statutes

o Provide that in the case of a total loss of the insured property: The measure of recovery = the face amount.

Regardless of is ACV at the time of the loss.o Point of Equity a valued policy forces the insurer to provide the coverage for which the insured has

paid with years worth of premiums. Zochert v. National Farmers Union

o How is loss calculated for silos? Actual cash value.

o Theres a $35,000 limit per silo. Spent $15,000 repairing them.o He is claiming $15,000 less his deductible. Insurance co. says $15,000 less deductible and

depreciation.o If you meet coinsurance you get repair or replacement w/out deduction for depreciation.

If you dont, get actual cash value.


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o Why allow repair or replacement of some things but actual cash value of other things? Consumer v. Commercial

Consumer point is to put you back in the position you were before. Things like silos more like a business asset. Dont want to get to replace it as more than it is worthtoday huge moral hazard problem.

o No more than cash value until actual repair or replacement is complete.o Actual cash value is meant to be different method of evaluation than cost to repair or replace; 3 ways

to measure 1. Market Value 2. Replacement cost less depreciation and 3. Broad evidence test

o Here, they use broad evidence test. Coinsurance Clauses

Why Provide for Coinsurance in a Policy?o To prevent an insured from only insuring against partial loss.o To make sure homeowners buy more coverage.o Property coverage is priced evenly it doesnt go up with the risk of more or less loss. The 4

th$100,000 of coverage costs the same. With liability, the higher are cheap b/c priced according to therisk.

Why Would an Insured Only Insure for a Partial Loss?o Partial losses are more likelyo Premiums are constant

Sample Policyo Section I Conditions; C; Loss Settlement; Subsection 2

If, at the time of loss, the amount of insurance in this policy on the damaged building is 80%of more of the full replacement cost of the building immediately before the lossfull cost torepair or replace.

If the amount of insurance in this policy is less than 80% of the full replacement cost of thebuilding, we will pay the greater of the following amounts, but not more than the limit ofliability

1. Actual Cash Value or 2. That portion of the cost to repair or replace which the total amount of insurance on

this policy bears to 80% of the replacement cost. 80% means that the amount of insurance you have is at least 80% value of your house.

Meet coinsurance provision if you insure your house for 80% of the cost to repair orreplace.

Exampleo Repair or replace cost = $125,000o Policy = $75,000o ACV = $10,000o Homeowner has a loss that would cost $20,000 to repair or replace.o 80% of full replacement cost ($125K) = $100Ko Not $100,000 worth of coverage; only $75,000o Didnt buy 80% so will pay actual cash value (here: $10,000) or that proportion of the cost to repair or

replace, after application of any deductible and w/out deduction for deprecation, that part of thebuilding damaged, which the total amount of insurance in this policy on the damaged building bearsto 80% of the replacement cost of the building.

o Fraction = $75,000/$100,000 = amount bought over the 80% to repair or replace.o $75,000/$100,000 = 0.75 * $20K = $15K

o Gets $15,000 or $10,000 (actual cash value). But have to actually repair or replace to get $15,000.So likely to get the $10,000. Subrogation

Subrogationo Property insurer is usually subrogated to the insureds right of recovery against a 3

rd party for losscovered under the policy.

o Life insurers usually dont have this right. Principle of Indemnity

o Insured shouldnt profit from loss Collateral Source Rule

o Jury isnt informed that P has collateral source for payments


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Traditionalo Allocates financial responsibility to 3

rd party who caused the loss.o Tortfeasor pays but really their homeowners liability pays. Negligent party bears the cost. Insured

doesnt get a windfall. Sample Policy pg. 216

o An insured may waive in writing before a loss all rights of recovery against any person. If not waived,we may require an assignment of rights of recovery for a loss to the extent that payment is made byus.

o If an assignment is sought, an insured must sign and deliver all related papers and cooperate with us.

Two Wayso Passive subrogation dont intervene in the lawsuit, just asserts its subrogation rights and notifies theneighbors lawyers.

o Active insurance co. sues on its own. Maybe homeowner has no incentive to sue b/c all they haveis property damage. So you would just assign your claim and insurance co. would be the P. Be anamed party.

o In the middle intervene in Ps lawsuit. Only if tort lawsuit. Would have to be active if insured is notgoing to sue.

Even if no K language, equity would recognize subrogation claim. B/c if not, homeowner would get windfall.So even absent K language, CL recognizes an equitable subrogation claim.

o If no K language, then equitable principles come into play: Wont have to pay insurance subrogation if insured has not been made whole. Equitable is

only to prevent insured from getting a windfall. Common Fund Principle you can argue that if you pay them subrogation, they have to pay

33% of that b/c you are paying your lawyer. They have to contribute to lawyers fees inrecovering a common fund.

Some jurisdictions have said they are doing away with collateral source rule and subrogation all around.o So you are just not allowed to recover if you have been paid by a collateral source.o Insurance company and insured are really paying for damage caused by a tortfeasor.o So insurance will be more expensive.

Prospective Releases/Waiver of Right to Sueo Great Northern Company v. St. Paul Fire and Marine

Bought a three year property policy. Then entered into construction K and in that K waivedthe right to sue.

Can waive a right to sue before a loss. No subrogation rights to interfere with before a loss. Pre-loss you can, post-loss you cant.

Settlemento If insured settles with neighbor after loss but before receiving policy coverage, insurer does not have

to pay insured (voids policy).o If insured settles with neighbor after receiving policy coverage, the insurer can only sue the 3

rd party ifthe insurer has provided notice to the 3rd party

Insurers will always notify the tortfeasor that it has the right to sue (and insured does not havethe right to settle) before it pays claim to the insured.

Usually, party with subrogation interest will be involvement in settlement discussions.o Should made whole rule apply when the insured settles for less than total damages?

Once you have a jury decide what your injuries are, you cant take a position inconsistent withthat. Cant say you havent been made whole. So cant make a made whole argument insubrogation litigation.

o Another Case Primary insurer and law firm it hires owe a duty to insured defendant. Primary insurer gives

updates to excess insurer. May tell them theyre not exposed but then settle for millions andexcess has to pay. So they sue lawyers. Argue subrogated to nursing homes claims for legalmalpractice against the law firm. A big dissent that the legal malpractice claims were enough.Enough to establish a duty. But majority said no. Might owe a duty to an excess insurer thatyou dont even have a contractual relationship with.

Limited Interests/Mortgagees If you buy a house and bank loans you money, they are going to make you get property insurance and name

them as mortgagee. Sample Policy

o If a mortgagee is named in this policy, any loss payable under Coverage A and B will be paid to the


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mortgagee and you, as interests appear. If we deny your claim, that denial will not apply to a validclaim of the mortgagee, if the mortgagee

If we pay the mortgagee for any loss and deny payment to you: We are subrogated to al the rights of the mortgagee granted under the mortgage on

the property; or At our option, get assignment mortgage.

Generallyo Insurer will pay mortgagee up to limit of liability or the mortgagees interest.o If the insurer pays all of the mortgage, insureds debt to bank is cancelled and insured gets the rest of

the coverage.o In sample policy, the mortgagee will only get that which is payable under dwelling and other structure

coverage. Effects of Misrepresentations by Insured

o Insurer still pays the mortgagees interest even if insured makes misrepresentations that are groundsfor voiding the policy.

o Insured has a subrogated right of mortgagee. Northwestern Farm Bureau v. Alhauser

o House fire; insurer pays mortgage but denied coverage to homeowner b/c of materialmisrepresentation; insurer gets assignment and steps in shoes of bank and tries to foreclose onhomeowner claiming homeowner has obligation to pay mortgage.

Subrogated rights of mortgagee: by paying the bank off, insurer gets to step in the shoes ofthe bank thus having a subrogated right to foreclose.

Farm Bureau pays mortgagee even though it denied claim as to insureds. Althausers claim that debts were extinguished and that bank has no foreclosure rights

Court says they do. What if one spouse burns down house leaving an innocent spouse?

o Some courts have allowed innocent spouse to recover.o Some courts went with reasonable expectations.o Others are worried about moral hazard so they treat technically

I.e. are they joint tenants thus making them one insured?o Sample Policy

If one insured intentionally causes a loss, no insureds are covered. What if homeowner wants to rebuild with the proceeds?

o Occasionally courts have allowed this, but usually banks get to decide. LIFE INSURANCE Types of Life Insurance

General Note when reading a policy, first determine whether there is a statute that controls. Term (Pure Insurance)

o As you get older (policy matures), premiums increase.o Can obtain term life with right to renew at certain premium (more expensive).

If you dont do this, when you go to renew it will be more expensive, b/c youre older. Permanent Insurance

o Whole life insuranceo 2 parts: 1) life insurance and 2) investmento Premiums appear to remain constant, but as you get older (policy matures), the cash value increases

and the true insurance portion of face value declines.o Investment feature (key distinction)

Term life insurance plus accumulation of a cash or investment value that permits the insuredto surrender the policy for that value.

You can cash out (if you reach a certain age) policy or borrow against it. As you get older, more of what youre paying for is the investment.

o Universal Can alter the premium and death benefit instead of those being fixed.

o Variable Premiums might be invested in different accounts and guarantee true insurance.

Credit Insuranceo Lending institutions sometimes purchase life insurance on the life of the debtor so that it pays off the


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debtors debt. Value of amount of insurance is underlying debt. Convertible (from term to whole) Annuities

o Kind of opposite of life insurance.o If you purchase one today, it gives you the right to receive fixed payments until you die. Cost depends

on your expected life. Get moneys worth if you outlive your expected life. Form Life Insurance Policy

Declarations page Premium structure

Contracto Promise to payo Incontestability

Standard. Will not contest a misrepresentation after policy has been in effect for 2 years.o Suicide

Moral hazard. Here it is one year. Ownership (transfer and assignment)

o Could be different from insured and beneficiary.o Owner has a right to transfer ownership.o Owner can change beneficiary and has to pay the premiums.o Owner can also assign the rights to collect as security.

Payment of premiums (grace period and refund) Convertibility

Beneficiaries (naming and changing)o Requirements to do thato Direct and contingent beneficiaries

For ex. if direct are dead Usually, easy to show the death. In the case of a missing person might litigate over that. But usually no issue

over coming w/in coverage. Then, book has sample application. Percy says this is actually short. Will come to your house sometimes and make you take blood work, etc.

Binders Approval Binder

o Coverage exists as of the date of application/binder if the application is approved before a loss Policy does not have to be issued; just must have been approved. Conditional on approval

Before a loss is the key provision A loss occurring after application date but before approval is not covered.

o Example 1/1/12 Binder 1/7/12 Approved 1/9/12 Policy Issued If you died on the third not covered b/c application not approved before the loss. If you died

on the 8th you would be covered. Conditional Binder

o Coverage exists as of the date of application if we are assured of insurability. Assured of insurability = medical exam/review

o Example 1/1 Binder 1/4 Pass exam 1/7 approved 1/9 policy issued 1/3 loss is not covered 1/5 loss is covered 1/8 loss is covered

Unconditional Bindero Coverage exists until policy is issued or until notice of rejection is given.

Still covered after you fail an exam, and after not approved until rejection notice. How can insurer avoid problem?

o Dont issue a binder


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o Decline to request payment of the first premium with the application. Gaunt v. John Hancock Mutual Life Insurance Company

o He was shot. This court says it wasnt accidental b/c someone intentionally did it. But a lot of courts would call being shot accidental b/c it is unexpected.

o Aug. 3 Gaunt applies, pays premiums and passes examo Aug. 9 Home office asks for another examo Aug. 17 Lay medical examiner in home office approves applicationo Aug. 20 Home office asks for more info re: drafto Aug. 24/25 Response to 8/20 request made.o Aug. 26 Final approval.o Shot on the 24 or 25.o Policy says if:

(a) satisfaction of insurability and (b) approval before death

o Then: Coverage as of the time of completion of part B

o Box to check on application. Coverage exists at time of approval or part B.o Not covered under legal language of policy. But court said he had a reasonable of coverage b/c he

passed the medical exam. Reasonable person would have read it as coverage.o What the policy really says is youll never be covered from the time of completion of Part B until final

approval.o Paid premium, gave him this binder so thought as soon as I pass the medical test Im good.o So the court said the language was misleading and he got coverage. Even though insurance person

would understand it. Accidental Death Double Indemnity Provisions

Pay proceeds when death was accidentalo Might exclude some things that regular life insurance provisions wont.

Accidental death benefits will be paid if the insured died as the result of accidental bodily injury. The benefit isnot payable if death were contributed to by disease or bodily mental infirmity.

o Kind of like ACC clause. Contributed to by something else or concurrently.o W/out this language would argue efficient proximate cause

Multiple causation issueso directly and independently of all other causes

Double indemnityo You get double coverage if you come w/in the provisions. Usually accidental death. Beneficiaries

might need more money for accidental deaths.

Insurable Interest Purpose

o To combat moral hazard and wagering Parties Involved in Life Insurance

o Owner pays for the policy, can name and change beneficiary, retains right to change things. Can sell or transfer ownership of policy. Can assign the right to the proceeds.

o CQV life insuredo Beneficiary receives the proceeds

Scenarioso Owner is CQV

Owner has an insurable interest. Beneficiary needs no insurable interest.o Owner is not CQV

Owner and beneficiary must have insurable interest in on the persons life who is insured. Kinds of Insurable Interest (some states have statutes defining insurable interest; sometimes they arent very

clear)o Close Family Relationships

Spouses Parents and minor children The further apart you get with family ties, less likely to a court is to find an insurable interest.

Aunts and uncles most courts have said too far. Siblings most courts have said ok.

Most statute says something like close personal relationship so its kind of case by case. if


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you can show that relationship you have an interest. But the farther you get, the less likely.o Business Relationships

Business Partners Key Man Creditors

Can have an insurable interest in the amount of the debt. Some courts cap amount of insurable interest at, or right above, amount of

debto Policy amount and interest cant be grossly disproportionate; would

defeat insurable interest.o Example Statute

Love and affection. Economic interest.

Ryan v. Tickleo Two business partners made each other the beneficiaries of each others life insurance policies.

When one died, his wife sued and tried to get the pay out.o Bought two policies insuring their joint lives, would pay to survivor of the two.o Wife is suing saying there is no insurable interest.

Argues it is like wagering and void b/c face value of the policy grossly exceeded the insurableinterest.

o Is it a wager? Might have the effect of a wager if survivor better off (depends on how profitable company

would have been if both survived)o Court doesnt have to decide. Wife didnt have standing to bring the claim.o Rule only the insurer has standing to assert lack of insurable interest.

Some states have statutes that allow the estate to sue the recipient of the proceeds based onlack of insurable interest.

This might be the rule b/c in cases like this it would have been so hard to figure out if therewas an insurable interest.

Insurable interest for life insurance is determined when the policy is issued/purchased.o Note: this doesnt prevent all moral hazard.

The Creditors Insurable Interesto Policyholder must have an insurable interest

In the life of the party insuredo ANDo At least equal to the amount of coverage purchased

Where the relationship is between debtor and creditor, the amount of the debt is typically thelimit of the creditors interest.

o Note Case Someone owed a guy $200. He took out $240,000 worth of life insurance. Took him hunting

and the guy died on the hunting expedition. Even if you could not prove he committedmurder, could say the face value exceeds the credit limit by such an amount that policy isvoid b/c of lack of insurable interest.

Interpleadero File a lawsuit and name the two competing interests as defendants. Serve them and then they litigate

Usually the lie insurance company can be dismissed as a party. Assignment/Transfer of Ownership

o Sample Policy pg. 312 Owner

Can transfer ownership (written proof required)

Can assign as collateral security If you owe a creditor, you could make an assignment.

o Creditor has an insurable interest Can name or change beneficiary Owns policy, pays premiums, can sell policy, assign proceeds, and change

beneficiary. If you die and no beneficiary and no contingent beneficiary the proceeds to go your

estate. Proceeds

If proceeds go to beneficiary are not subject to claims by creditors of estate.


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o Rights Transferee basically anything the owner could have done Assignee only has right to proceeds

Right to proceeds is superior to beneficiaryo Grigsby v. Russell

Owner had a policy. He needed surgery. He sold the policy to the doctor. Transfer ofownership.

Can you buy a policy and later sell it to someone who has no insurable interest? Yes, as long as legit transaction at the outset. Owner who is also CQV can assign

policy to person w/out an insurable interest. Insurance policies are assets. So if you cant sell that is not letting you transfer your

property. Must assignee/transferee have insurable interest?

Rule: if transaction is legit at the outset, owner/CQV can assign policy to a personw/out insurable interest.

If the transaction is a sham (wager) from the outset, the policy is void ab intitio. Why no insurable interest requirement?

Life insurance is an asset like anything else. Where the owner is the CQV, assignment would be the same as naming assignee a

beneficiary. Can also assign right to proceeds. Assignee cant change beneficiary or anything like that.

Those are ownership rights. What if you immediately assign it to a friend who lacks an insurable interest? Most courts say

that if void. If that is what you meant to all along. But could name as beneficiary. Changing Beneficiaries

Sample Policy pg. 315o The owner can change beneficiaries.

While the insured is living, OR W/in 60 days after insureds death, if the insured, just before his/her death was not the owner

o Effective Date pg. 316 The effective date of a name change will be the day a written request is signed.

IF the home office receives an acceptable written request. Strict Compliance

o Complies with the terms of the policy E.g., policy may require that the change of beneficiary be requested on a form satisfactory to

the company.

Sample policy written request that is acceptable to the company.o Fact-Intensive Inquiry

When questionable who the beneficiary is, the insurer should commence interpleader actionand make payment of proceeds into court.

Substantial Complianceo A narrow exception to the requirement that the owner of an insurance policy can change the

beneficiary only by strictly complying with the terms of the policy.o The owner will have effectively changed the beneficiary if the following is proven:

1. The owner clearly intended (expressed intent) to change the beneficiary and to designatethe new beneficiary.

AND 2. The owner has taken substantial affirmative action to effectuate the change in the

beneficiary.

o Majority of courts recognize this doctrine. Engelman v. Connecticut General Life Insurance Company

o It was a policy insuring her life. She doesnt like the nephew. She wrote a letter saying she wanted tochange. Had the policy # a witness, etc.

o They sent a form back but the form was asking for the same thing the letter wanted.o Her letter included all important info. They put the letter in the file. No proof she ever got the form they

sent.o Trial court said not enough b/c she didnt do all that was physically possible.o Appellate court then says she did enough. Substantial compliance.

Avoiding Payments by Mistakeo Divorce


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Divorce alone does not operate to change designated beneficiary. A divorce decree that specifies that the former spouse is no longer the beneficiary does,

however, suffice. Some courts enough that the decree says the former spouses interest is

surrendered Others require specific language about the beneficiary status.

o Date of Change Generally, the interest in the policy vests at the time of the insureds death. Therefore, if a change was in the process of being made (e.g., form in transit) when the

insured dies, the change will not apply. Murdering the CQV State Mutual Life Assurance Company v. Hampton

Hampton Caseo Insurance co. denies proceeds b/c she is accused of murdering her husband. She is acquitted.o First part of the statute says if youre convicted.o The court says it doesnt matter what the statute says. CL rule. Pre-existing CL rule that says if you

kill someone you dont get proceeds. Whether or not youre convicted.o So then her argument is that she was acquitted so court has already tried the issue of whether she

killed him or not. Court says acquittal doesnt matter. Two different BOPS. And other parties not represented in

criminal case.o Does not bar re-litigation in a civil issue.o Lots of states have these statutes, called slayer statutes. And there might be broader CL rules in

those stateso General Rule if the CQV is murdered by the beneficiary, proceeds go to the contingent beneficiary

or the estate. Conviction Deprives Beneficiary of Right to Proceeds

o Statutory in some states, but conviction not necessary under the CL. Acquittal (or other resolution in criminal proceedings)

o CL Leaves issue open for resolution in civil proceeding

What Constitutes Sufficient Intent?o Negligence not enougho Gross negligence amounting to reckless behavior maybe enougho Insanity wont work; cant form intent

Holdingo It is not required that a beneficiary be convicted in order to be disqualified from receiving the

proceeds. An acquittal does not per se entitle the beneficiary to recover proceeds.

Slayer Statuteso Conviction deprives beneficiary of right to proceedso But conviction not required

Acquittal or other resolution in criminal proceedings leaves issue open for resolution in civilproceedings

Different BOP Fairness/due process to other potential beneficiaries Murdering beneficiary has BOP that he is the legit beneficiary, then the BOP shifts

to contingent beneficiary to prove intention to cause death. Potential Homicide-Related Preclusions from Recovery

o Self-Defense

Statute says unlawful and intentional Self-defense is not unlawful

o What if there is suspicion but no arrest and no competing claim? Insurance companies might want to put the money in interpleader

Some courts insurer will not be liable later to contingent beneficiaries if they act ingood faith.

Some courts must have conviction to bar recovery.o Plea Bargains

Interpleader Viatical Companies


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A company purchases the policy from owner for a percentage of the face value. The company is assigned thepolicy and is entitled to the proceeds and responsible for the remaining premiums.

o Allows people to get money immediately for things like medical expenses.o Transfers are highly regulated to avoid unsavory situations.

Life Settlements/Accelerated Benefits Some life insurers allow benefits or life settlements for elderly or terminally ill policyholders in the last years of

their lives. Stranger-Originated Life Insurance

Procuring a policy with the intent to assign:o

8

th

Circuit held such a policy to be void.o Does happen b/c difficult to prove.

Common Disaster Problem Most states have Model Acts saying that if CQV and beneficiary die at the same time

o Proceeds go to contingent beneficiaries or revert back to estate Creates problem of proving who died first.

o Model Uniform Simultaneous Death Act 1993 Version

An individual who is not established by clear and convincing evidence to havesurvived the other individual by 120 hours is deemed to have predeceased the otherindividual.

Treated as dying at the same time so the proceeds go to your contingent beneficiaryor your estate.

Limitations of Risk Silverstein v. Metropolitan Life Insurance Company

o Policy covered death caused directly and independently of all other causes by accidental means.Policy did not cover deathcaused wholly or partly by disease or bodily or mental infirmity ormedical or surgical treatment therefore.

o He had a small ulcer. He sustained a blow on the job. Would not have flared up or caused any harmabsent some kind of external blow like the one he suffered.

o Court said the ulcer was not a disease or infirmity within the meaning of the policy.o Insurance co. caused directly and independently. So but for the ulcer, the milk can falling would not

have killed him. If anything else contributes youre excluded. Kind of like the ACC clause.o But court says the disease or infirmity must be so considerable or significant that it would be

characterized as disease or infirmity in the common speech of men.o So his estate wins.

Rely on reasonable expectations doctrine. Would think the policy would cover something setoff by an external force if it was unexpected.

If disease causes a fall, you shouldnt be covered. Accidental Means/Death

o Coverage Accidental death is a coverage issue

Beneficiary has BOP Might get double indemnity

o Exclusion Suicide is an exclusion issue

Insurer has BOPo Accidental or Not Accidental

Where CQVs actions might in some way contribute to the death. Arguably there is no moral hazard here. The CQV is not likely to increase the risk of

dying b/c he has life insurance. Examples

CQVs death = innocent bystander Usually accidental

If the CQV is the aggressor or engaged in criminal activity Probably not accidental Some courts say death is foreseeable Some policies explicitly exclude death while committing a crime

Unintentional Drug Overdose Depends on whether policy says accidental death or accidental means


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o If policy covers means not accidental. If you engaged in voluntary intentional behavior that results in accidental

death you cant recover under accidental means policy. Some courts are no longer concerned with whether the means were accidental as long as the death was

accidental.o Most policies now are accidental death.

Accidental Death: E.g., covers accidental death; not payable if death was contributed to by disease, etc.o Pays proceeds when death was accidentalo Accidental death benefits will be paid if the insured died as the result of accidental bodily injury. Not

payable if death was contributed to by disease or bodily or mental infirmity.o Multiple causation issueso Some courts say accidental from the standpoint of the insured.

Modern Ruleo Efficient Proximate Cause

Accident must have been the dominate or substantial cause of death. What if a brain tumor caused a hiker to lose consciousness to fall off a cliff and die?

Caused by disease. Some courts have found these falls were covered, if fact-finderfinds fall to be efficient proximate cause. Directly and independently. Language isattempt to K out of efficient proximate cause rule.

In an accident, go hospital, die from infection you got there? Efficient proximate cause. A lot of courts would say you are insured; reasonable

expectations. Some courts will say not covered. If you die during surgery, surgery caused by disease, but death is caused by something

accidental. Courts would go both ways.

Over-exertion that results in death. Vigorous exercise that results in fatal heart attack. Courts are split.

Some of the arguments are exactly the same that we saw with the ACC clause.o Language v. Reasonable Expectations

Was the death unexpected from the standpoint of the insured? In Silverstein, yes. So thecourt used the reasonable expectations test.

A lot of courts if death was caused by accident and disease, was accident the dominatecause of the death? Based on reasonable expectations, it looks like a lot of courts will ignorethe language and apply efficient proximate cause.

Drunk Driving/Risky Behavioro Majority Rule death that occurs while insured is driving under the influence is not accidental.o Daredevil behavior = split as to whether the court will look at the means (which would not be

accidental) or only at the death (which would be accidental).o Accidental drug overdose = splito Consider: was the death unexpected from the standpoint of the insured?

Death While Committing a Crimeo Modern trend courts tend not to create implied exceptions for deaths caused while the insured is

engaged in criminal activity. Could be express exceptions.

Suicideo Why have suicide exclusion?

Moral hazard Usually a 2-year exclusion for suicide so CQV wont buy insurance knowing they are

planning to killing themselves.

Incontestability General Incontestability Provision the insurer cant deny coverage after 2 years (even if there has been a

misrepresentation)o Usually applies to misrepresentation, fraud, concealment.o Insured has to survive 2 year period. If dies after 2 year period, certain things become incontestable.o When does it start to run? Might be when issues. But in some cases there might be an issue if there

is a binder. Need to look at the policy and figure out when it starts to run insureds need to makesure they are comfortable with when it starts.

Purposeo Provide assurances to insured/beneficiary that coverage exists and the beneficiary will be protected.


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o Prevents insurer from raising defenses after insureds death (insured person is always going to bedead. So they cant testify as to what they said or if they told the truth).

Prevents investigating after death instead of at time of application Dont want beneficiaries to have to do battle with powerful insurance carriers. Incentive for insurer to discover fraud early Want to encourage life insurance companies not to engage in post-claim underwriting so that

they are looking for a reason once you die to deny coverage. Amex Life Assurance Company v. Superior Court

o Sample policy: w/in incontestability period, may deny coverage based on a materialmisrepresentation (would have affected decision somehow). But after that, cant. Here, 2 years (prettymuch standard). If attempt to raise that after that period, insurance may be barred.

o This guy was HIV positive. He applies in his name, says hes not HIV positive. Sends someone elseto take the blood test.

o Court focuses in part on how easy it would have been to see it was an imposter. Noticeably differentheight and weight, no ID. And looks unhealthier or older than his stated age.

o And insurer still relied on his blood test.o Amex argues imposter defense that it never had K with Morales b/c imposter gave blood. But those

cases (where imposter defense was raised) are where the imposter applies as someone else.o Court lets this guy get coverage.o There are some costs to the incontestability clause. This guy is covered. Some fraudulent claims will

be covered. Some states have said if the applicant meant to lie, i.e. fraudulent, that is contestable.o But here, the court says even that is incontestable.o Gives people an incentive to lie.

Test for Contestabilityo Coverage v. Validity

Arguments that go to coverage remain contestable, i.e. was your death accidental? Validity does not, i.e. void policy based on misrepresentation.

o Void ab intio v. Voidable If the policy was void from the get-go, it remains contestable. Whether its voidable becomes

incontestable.o Exceptions v. Conditions

Exceptions can always be raised but a condition becomes incontestable.o Discoverable v. Non-Discoverable

Maybe not the best test. Becomes Incontestable

o Goes to validity, voidable

Fraud Misrepresentation Breach of Warranty Concealment Majority

Condition requiring insured to be in good health Split

Eligibility (work full-time under group policy) Remains Contestable

o Policy bought with intent to murder CQV (void ab initio)o Premiums not paid (goes to coverage)o Death was not accidental as required (goes to coverage)o Majority

No insurable interest void ab initioo Split

Eligibility split about whether lying about an eligibility requirement is incontestable after thetwo year period.

Negligent Actions Against the Insurer Mauroner v. Massachusetts Indemnity and Life Insurance Policy Negligent Delay

o CQV applied and paid premium on the same day, but application wasnt processed until 13 weekslater (usually took 4-8 weeks). Insured committed suicide 3 weeks before the 2-year period excludingsuicide.

o Beneficiary argued that it was the insurers negligent delay that caused the death to be outsidecoverage (i.e. excluded by suicide exclusion) thereby damaging P.


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Argument insurance company took so long that the suicide period started to run later. Hewould have committed suicide outside of the suicide period and would have been covered butfor the delay.

o Negligence claim court goes through the elements Negligent delay on the part of the insurer = the time between completion of application and

the time it takes the insurer to process it. The court found the delay to be unreasonable in this case; amounted to negligence.

36 day delay. Doesnt sound like there was an expert for standard of care but courtstill said unreasonable.

o Rule ordinary negligence must be proven (including causation)o Held insurer was negligent and that negligence was the cause of Ps loss.o What does the standard of care require?

There was a breach. How does she prove causation? If it had been issued in a timely manner he would have been

w/in coverage. Policy should have been, under the standard of care, issued at least 3 weeksearlier and if it had he would have been covered when he committed suicide.

The insurance co. would have had a proximate cause argumentthat this is not the type ofrisk protected against.

Negligence Claims Against Life Insurance Companieso Wrongful Death Claims

Negligently issued a life insurance policy w/out an insurable interest and then that personwent and killed person covered.

o Should they have to tell you if they discover you have a communicable disease? Argument under Learned Hand Theory that they should

o What about telling beneficiaries that they have been changed? Bigger stretch

HEALTH INSURANCE Differences in Health Insurance

Not standardized to the same extent that other policies are. What is different about health insurance?

o A lot more claims. Know you are going to use it.o A lot of group policies.o Public and private insurers. Private and the government.o Access

It is estimated that there are about 43-48 million Americans who are uninsured. Who is uninsured?

Poor who are ineligible for Medicaid Making too much to qualify for Medicaid but not enough to buy private

Unemployed Young people

Costo Cost is dramatically increasing, about $2.4 trillion in 2007 (17% of GDP); $7900/persono Annual premium for family of 4 = $12,700o Annual premium for single person = $4,700o That is one argument for health care insurance if you cover everyone, the total cost will go down.

So if you give them access to preventive care it will be cheaper in the long run than sharing the costof the acute care.

Qualityo Infant mortality rate is the worst in the developed worldo Life expectancy lags behind many other countries

Healthcare Reform and PEC Exclusiono Pre-existing condition exclusion is necessary to the integrity of the insurance being sold. But public

policy reason we want people who have cancer to be able to get coverage. The individual mandategoes with this. Cant adverse select and wait 6 years if you have to get it today.

o If we want to get rid of pre-existing condition exclusion have to make people buy it today. Is access to health care a right/entitlement or is like any other consumer good? Unlike other types of insurance, health insurance covers small, routine, expected losses.


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Something youre going to consume at a certain level every year. There are private and public providers of health care services and funding.

Pre-Existing Condition Exclusion (PEC) Definition: (usually defined in the policy)

o A good policy ought to define pre-existing condition Examples

Affliction for which insured was diagnosed or received treatment. Broader symptoms for which a reasonable insured would have sought a diagnosis

or treatment

Serves to combat adverse selection Look Back Period

o Typically 6 months to 2 years What period it looks back to in order to determine pre-existing conditions

Exclusion Periodo Most policies say for 1

st yearo Some try to exclude forever

Lawson ex. rel. Lawson v. Fortis Insurance Companyo Goes to ER before getting coverage. Diagnosed for something. Doctors didnt know it was cancer.

Dad gets coverage like 2 days later. Later, when policy is in effect, diagnosed with cancer.o While the policy is in effect, she receives lots of treatment for the cancer.o Policy excludes coverage for pre-existing condition, defined as Sickness, Injury, disease or physical

condition for which medical advice or treatment was recommended by a Physician or received from aPhysician w/in the preceding five year period.

o Sickness is defined as illness, disease, or condition which is diagnosed or treated while this policy isin force.

o The court here lets her get coverage. At a minimum, language is ambiguous so construe againstdrafter. Focus on the word for. Connotes intent.

o Here, the parents, the daughter, and the ER didnt know it was leukemia.o Let her get coverage, but if you think about the policy reasons behind the exclusion, just b/c you dont

know what you have doesnt mean you havent adversely selected. Other cases where courts have enforced pretty broad exclusions if umambiguous.

HIPPA (Health Insurance Portability and Accountability Act of 1996)o Only applies to employer-provided insuranceo PEC

Must relate to condition for which medical advice, treatment, or diagnosis was received orrecommended

o Look Back Period 6 months (at most)

o Exclusion Period Not more than 1 year With credit for previous coverage Unless there is a gap of 63 days

i.e., a person covered under prior policy has to get a new job within 63 days in orderto receive coverage credit (from prior policy)

Switch jobs, get employer-provided healthcare at your job. Exclusion period is only one yearas long as you had coverage under an old policy for one year. So get credit and you arecovered.

o HIPPA was aimed at job lock Youre at a job, worked there forever, you get cancer. Then you change jobs and heath

insurance might get denied. This is what HIPPA fixed. At least one circuit held that a similar PEC clause applied when the insured learned from her physician that

she had a breast lump before the policy was issued. She was not diagnosed with breast cancer until after thepolicy was issued.

New Healthcare Policy Coverage for pre-existing conditions Universal mandate If youre 26 you get to stay on your parents Now bans exclusions for minors Limitation on total amount of premiums received that any insurance co. can use on administration.


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Cost containment measures, i.e. preventive care is cheaper than care when someone gets sick. Other issues, how are you going to pay for it? Big increase on Medicare tax rate. Cadillac plans. Will have an income tax on fancy plans. Fees on insurance. Couple that with the fact that we have the most expensive healthcare in the world w/the fact that we dont

have the best. Basically sucks. Cost Containment

HMOso have to receive your healthcare from someone in the HMO

PPOso Preferred provider. Attempt to do the same thing. Encourage you to seek treatment from a member in

the PPO. Deductibles, co-pays

o Not a huge disincentive to have to pay $15 to go to the doctor. Pre-Authorization

o Have to get approval before treatment/surgery.o Not sure that is particularly effective, given the administrative costs.

Limiting coverage treatment that is medically necessary or not part of research, etc.o Medically Necessary

Coverage only if treatment is medically necessary Treatment is not medically necessary if:

Furnished in connection with medical research

Not authorized by Health Care Financing Administrationo Fuja v. Benefit Trust Life Insurance Company

Policy listed five criteria, each of which had to be met for it to be medically necessary. At issue here: no

Documents

Insurance Percy Spring 2012 BOOM