Chapter 49Insurance

Insurance

Insurance is a contractual arrangement for transferring and allocating risk.Risk. Prediction concerning potential loss based on known

and unknown factors.

Risk Management. Involves the transfer of certain risks from the

individual to the insurance company by a contractual agreement.

§ 1: Insurance Terminology and Concepts

Insurance Terminology.The Concept of Risk Pooling.Classification of Insurance.Insurable Interest.

Insurance Terminology

Policy (Insurance contract).Premium is the consideration to be paid to the insurer. Underwriter (usually an insurance company).Broker v. Agent.

The Concept of Risk PoolingAll insurance companies spread the risk among a large number of people - the pool - to make premiums small in comparison with the coverage offered.Insurance companies correlate data over a period of time to estimate fairly accurately the total amount they will have to pay if they insure a particular group, as well as the rates they will have to charge each member of the group so they can make the necessary payment and still show a profit.

Insurance is Classified According to the Risk Involved

Insurance is classified according to the nature of the risk involved.See Exhibit 49-1 in textbook for Insurance Classifications.

Insurable Interest

A person can insure anything in which he or she has an insurable interest.Types of insurable interest:Life. Property.

Life Insurance

Anyone who has an insurable interest.Must have a reasonable expectation of benefit

from the continued life of another.Insurable interest must exist at the time the

policy is obtained.• Policy remains valid, even after interest no longer

exists (divorce).• Key-person insurance -- insurance obtained by an

organization on the life of a person important to that organization.

Property Insurance

Anyone who has an insurable interest.A person who derives a pecuniary benefit from

the preservation and continued existence of the property.

Insurable interest must exist when the loss occurs.

§ 2: The Insurance Contract

Governed by the general principles of contract law, and regulated by the state.Application is an offer, which insurance

company can either reject or accept.• Acceptance sometimes conditional.

Need consideration.Parties need capacity.

The Insurance Contract [2]

Application For Insurance.Effective Date.Provisions and Clauses.Interpreting Provisions of an Insurance. Contract.Cancellation.Basic Duties and Rights.Defenses Against Payment.

Application For Insurance

Filled in application attached to the policy and made a part of the contract.Misstatements or misrepresentation can void a policy, specially if company can show it would not have issued policy if it had known the facts.

Effective DateBroker is agent for the applicant.Agent is agent for the insurance company. He can issue a binder, if some consideration is paid, which will immediately bind the insurance company, depending on certain conditions being met.Parties may agree contract will not be effective until policy is issued and delivered or sent to applicant.Parties may agree policy will be binding, not be effective, until first premium paid, or physical exam passed.

Provisions and Clauses

Provisions Mandated by Statute.Incontestability Clauses.Coinsurance Clauses.Appraisal and Arbitration Clauses.Multiple Insurance Coverage.Antilapse Clauses.

Provisions Mandated by Statute

Provisions which are mandated by statute to be included in the insurance policy will be deemed to be in the insurance policy -- whether they are in the policy or not.

Incontestability Clauses

State statutes sometimes provide that once a life or health insurance policy has been in force for a specified length of time, the insurer cannot contest statements made in the application.

Coinsurance Clauses

If owner insures her property for at least 80% of its value, owner will be able to recover up to the face value of the policy.If owner insures for less than 80%, owner will be responsible for a proportionate share of the loss.

Amount of insurance recovery Coinsurance percentage = percentage(80%) x Property value

Appraisal and Arbitration Clauses

If insurer and insured cannot agree on value of property, an appraisal can be demanded.

Contract may also provide for arbitration.

Multiple Insurance Coverage

If insured has multiple insurance policies and the amount of coverage exceeds the loss, the insured can collect from each insurer only the company’s proportionate share of the liability, relative to the total amount of insurance.

Anti-lapse ClausesPolicy does not lapse automatically upon nonpayment of premium.Insured has a grace period of thirty or thirty-one days within which to pay the overdue premium.The insurer may be required to extend the insurance for

a period of time.Insurer may issue a policy with less coverage to reflect

the amount of the payments made.The insurer may pay the insured the cash surrender

value of the policy.

Interpreting Provisions of an Insurance Contract

Courts interpret ambiguity against the insurance company.Uncertainty as to whether policy actually exists is resolved against the insurance company.Insurer must adequately notify insured of any change in policy under an existing policy.

Cancellation

Insured can cancel policy at any time, and the insurer can cancel according to terms of policy.Insurer must give written notice of cancellation.

Basic Duties and Rights

Insured must act in good faith.Insurer has duty to investigate to determine the facts.Third party claims: Insurer is obligated to make reasonable efforts to settle the claim, and policy provides that in this situation insured must cooperate.

Defenses Against Payment

Insurance company can raise any of the defenses that would be valid in any ordinary action or contract:Fraud, misrepresentation.

• Not if information given was optional.• Not incorrect statement of age.

Concurrent causation doctrine.

§ 3: Types of Insurance

Life Insurance.Fire and Homeowner’s Insurance.Automobile Insurance.Business Liability Insurance.

Life Insurance

Types of Life Insurance:Whole life.Limited-Payment Life.Term Insurance.Endowment Insurance.Universal Life.

Life Insurance [2]

Features of rights and liabilities:Liability.Adjustment Due to Misstatement of Age.Assignment.Creditors’ Rights.Termination.

Fire and Homeowner’s Insurance

Standard Fire Insurance Policies:Liability.Proof of Loss.Occupancy Clause.

Homeowner’s Insurance:Assignment Property Coverage.Liability Coverage.

Automobile Insurance

Liability Insurance.Collision and Comprehensive Insurance.Other Automobile Insurance.Uninsured Motorist.Accidental Death Benefits.Medical Payment Coverage.Other-Driver Coverage.No-Fault Insurance.

Business Liability Insurance

General Liability.Product Liability.Professional Malpractice.Worker’s Compensation.

Case 49.1: Sotelo v. Washington Mutual

(Insurable Interest)FACTS:Delhurst Country Inn was owned by Randco,

mortgaged to Sotelo for $389,000, and insured by Washington Mutual under a policy with a $432,000 limit.

When a fire destroyed the Inn, Randco owed Sotelo $395,545.37, including $12,763.62 in late payment penalties, on two validly recorded mortgages.

Washington Mutual sent Sotelo a check for $220,576.17.

Sotelo sued claiming the amount was not enough.

HOLDING:Sotelo’s recovery was to be based on the

outstanding mortgage debt and late payment penalties totaling $395,545.37, minus what she had already been paid, plus interest.

The amount owed by the mortgagors for back taxes was not to be deducted.

Generally, the mortgagee’s insurable interest is the amount of the mortgage debt since the debt represents its personal interest in the property.

Case 49.1: Sotelo v. Washington Mutual

(Insurable Interest)

Case 49.2: American Guarantee v. Liability Insurance Co.

(Insurance Interpretations)FACTS:Ingram Micro’s entire operation depends on the proper

functioning of Impulse, a computer network program.American Guarantee insured Ingram’s “property,

business income and operations.” The policy insured against “[a]ll [r]isks of direct physical loss or damage from any cause.” Ingram’s computers, including Impulse, were insured under the policy.

Ingram experienced a power outage that caused the computer network to be totally disrupted for 8 hours. Ingram filed a claim.

HELD: FOR INGRAM.The court concluded that “physical damage” to a

computer, under a policy insuring against that risk, is not restricted to the physical destruction or harm of the circuitry but includes loss of access, loss of use, and loss of functionality.

In this case, there was property damage. Impulse was ‘physically damaged’ for eight hours. Ingram employees ‘repaired’ Impulse by physically bypassing a malfunctioning matrix switch. Until this restorative work was conducted, Ingram’s mainframes and Impulse were inoperable.”

Case 49.2: American Guarantee v. Liability Insurance Co.

(Insurance Interpretations)

Case 49.3: Paul Revere Life Insurance Co. v. Fima

(Defenses Against Payment)

FACTS:Fima applied to Paul Revere for a disability

policy. Fima stated that his income was $105,000 in the

previous year and $85,000 in the current year. His actual income was $21,603 and $6,320. The policy had a two-year incontestability clause.

Three years later, Revere discovered the truth, and filed a suit in a federal district court against Fima to have the policy declared void ab initio on the ground of lack of an insurable interest.

HELD: FOR FIMA.The U.S. Court of Appeals for the Ninth Circuit

held that “Every person has an insurable interest in his or her own life and health.” Thus, the policy was not void ab initio.

Also, “because the period for contesting the policy has passed under the incontestability clause, Revere may not now challenge the terms of the policy or the extent of Fima’s insurable interest.

Case 49.3: Paul Revere Life Insurance Co. v. Fima

(Defenses Against Payment)

HELD: