Professor Mayerson
Spring 2012
INSURANCE OUTLINE
INTRODUCTION TO INSURANCE
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Insurance Terms and Vocabulary ...............................................................................................
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Insurance Pricing ........................................................................................................................
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Insurability ..................................................................................................................................
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Development of Standard Policies ...............................................................................................
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The Business of Insurance ..........................................................................................................
INSURANCE CONTRACTS
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Enforcement of Pro-Coverage Interpretations .............................................................................
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Agents and Brokers .....................................................................................................................
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Underwriting and Nondisclosure ................................................................................................
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Notice Obligations .......................................................................................................................
FIRST PARTY PROPERTY INSURANCE
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First Party Claims .......................................................................................................................
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All-Risk .......................................................................................................................................
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Named Peril ................................................................................................................................
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Fortuity.........................................................................................................................................
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Appraisal ......................................................................................................................................
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Business Interruption and Extra-Expense Coverage ....................................................................
LIABILITY INSURANCE
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Structure of a Liability Insurance Policy ..................................................................................
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Bodily Injury and Trigger for Occurrence Policies .....................................................................
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Property Damage .........................................................................................................................
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The Duty to Defend .....................................................................................................................
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The Duty to Indemnify.................................................................................................................
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Approaching an “Occurrence Injury” Problem ............................................................................
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Number of Occurrences ...............................................................................................................
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Claims-Made Coverage ...............................................................................................................
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Intentional and Expected/Intended Injury ....................................................................................
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The Pollution Exclusion...............................................................................................................
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Products Coverage .......................................................................................................................
OTHER COMMERCIAL INSURANCE
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Directors and Officers Insurance .................................................................................................
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Directors and Officers Policies ....................................................................................................
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Fidelity Insurance.........................................................................................................................
INSURANCE COMPANY DUTIES
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Duty to Settle and Third Party Bad Faith ....................................................................................
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First Party Bad Faith ....................................................................................................................
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Performance of the Duty To Defend and Conflicts of Interest ....................................................
INSURANCE REGULATION
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How Insurance Regulation Works ...............................................................................................
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Rate Regulation............................................................................................................................
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Surplus Lines Insurance ..............................................................................................................
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Federal Regulation of Insurance .................................................................................................
REINSURANCE
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Purposes of Reinsurance ..............................................................................................................
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Types of Reinsurance ..................................................................................................................
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Reinsurance Contracts ................................................................................................................
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Duties at Contract .......................................................................................................................
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Contract Resolution in Reinsurance ............................................................................................
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Introduction to Insurance
I.
Insurance Terms and Vocabulary
a. Price Competition
i. Basics
1. When the insurance market is at “full rein” prices and profits fall.
2. Insurers meet competitors’ prices or lose business.
ii. When Margins Fall
1. When margins fall, insurers can develop new lines of insurance or business.
2. E.g. in the late 1960s after a decade of poor returns, property-casualty insurers used surplussurplus to diversify into life insurance, credit cards, real estate, etc.
3. Poor margins force firms to retrench, go under, or merge.
4. Insurance companies use “float” –money received from premium before losses are paid – for
investments which the insurer gets returns on.
iii. Coverage as a Commodity
1. If coverage is interchangeable from the customer’s point of view, low cost providers have an
obvious competitive advantage, taking market and profit share.
2. See, Warren Buffet’s letter to shareholders regarding additional avenues to take.
b. Continuity of Coverage
i. Basics
1. Continuity of Coverage comes from the standardization of primary insurance policies.
2. The market is able to write coverage with confidence because of excess insurance’s provision of
stability to underlying coverage.
c. Excess Insurance:
i. Definition:
1. Insurance coverage which can be purchased in addition to primary coverage and covers only
what the underlying primary coverage does not.
2. Typically the same company (most require that if you purchase umbrella from them, you must
also purchase underlying insurance from them.)
d. Reinsurance
i. Definition
1. Insurance of ICs  products liability for insurance companies (with insurance being the
“product.”)
2. Reinsurance protects insurance companies against the risk of paying out on policies.
e. Regulation
i. Basics
1. Insurance is regulated in order to protect insurer solvency and make insurance affordable
2. Insurance is regulated within each state by an insurance commissioner, who regulates the
“admitted market.” See more, infra.
3. Solvency is maintained through solvency/guaranty funds.
ii. McCarran Ferguson Act of 1945
1. Insurance is regulated by the states through this act which describes state regulation and taxation
of the industry being in the “public interest” and gives it preeminence over federal law.
II.
Insurance Pricing
a. Basics
i. Pricing
1. Companies buy insurance in order to mitigate risks of loss.
2. Most American businesses buy $100 million in limits. However, most are insured through more
than one carrier.
ii. Determining Rates
1. Underwriters evaluate the risk and exposure of the client (policy-holder) through the “rate
making” process..
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2. If a PH has a 1/1000 chance of having to pay out a million dollars, theoretically she should be
willing to pay the IC $10,000. (1/1,000 x 1M = 10k).
3. Because insurance is commoditized (with a standardized product and price competition),
premiums are much lower.
4. The price is determined by supply and demand.
5. Reinsurers and Retrocessionaires also allow insurers to have the necessary liquidity to offer
lower premiums.
b. Profits and Losses
i. The Cost of Underwriting
1. If the cost of paying out on claims is greater than the profits gained from selling the insurance
policy, there is an underwriting loss.
2. However, IC’s can make up for some loss by investments of their capital.
ii. Combined Ratio
1. Combined Ratio’s compare every dollar in premiums taken in by the company with every dollar
it pays out in claims.
2. CR of greater than 100 is a loss (assuming insurance company has net 0 gain/loss on
investments)
3. CR of 157 means for every dollar in premiums taken in, the company paid out 1.57.
III.
Insurability
a. Basics
i. One can only “insure” something or someone in which they have an “insurable interest.”
b. Three Types of Risk Protection
i. Gambling/Wagering
1. Gambling contracts are illegal.
ii. Warranty
1. If selling a product and defect/occurrence, then company pays.
2. This protects against “endogenous risk” or a risk intrinsic to the product being warrantied.
3. C.f. with insurance which protects against exogenous risks
iii. Insurance Contract
1. Protects against exogenous risks  a risk outside of the economic relationship b/w buyer and
seller.
IV.
Development of Standard Policies
a. Basics
i. Policies are standardized at the primary level.
ii. This facilitates price competition and allows the excess market to be able to confidently cover insurance
companies.
iii. Makes regulation easier
V.
Business of Insurance
a. Broker
i. Definition
1. A broker is the individual who represents the policy holder to the insurance company.
b. Agent
i. Definition
1. An agent represents the insurer to the policy holder.
c. Underwriter
i. Definition
1. An underwriter an employee of the insurance company who evaluates the risk and exposure of
the client and then is authorized to write the policy.
d. Claim Adjuster
i. Definition
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1. The claims-adjuster is the insurer employee who determines whether a loss falls within a given
policy and whether that loss will be covered.
2. She serves as an intermediary between the policy holder and insurer by helping the PH get
money from the insurer when warranted.
Insurance Contracts
I.
Enforcement of Pro-Coverage Interpretations
a. General Principles
i. If semantically possible, the harm should be treated as covered.
ii. If there is more than one reasonable construction of the language of the insurance contract, the policy is
“ambiguous.”
iii. In this case, if the policy-holder can offer a reasonable construction of the language, the court selects this
construction.
iv. E.G.: In a contract concerning a “pollution exclusion” stating that there is no coverage for pollution
unless it is “sudden and accidental,” “sudden” can reasonably mean “unexpected” therefore the exclusion
could reasonably allow for coverage of long term polluting events like a pipe leak if that pipe lead is
“sudden” as in “unexpected.”
v. N.B. in above case, Florida court found that “unexpected” was not a reasonable meaning of “sudden”
and therefore no coverage.
b. Two Step Analysis:
i. What is the reasonable interpretation of the contract?
ii. If the contract is ambiguous, it is strictly construed against the insurer.
c. Doctrine of Reasonable Expectations
i. Policies are enforced in line w/ the insured’s objectively reasonable expectations regarding coverage,
even if a very close read of the policy would have contradict those expectations. C&J Fertilizer v. Allied
Mut Ins. Co.
i. C&J Fertilizer - Policyholder should have reasonably expected that insurer wouldn’t pay for
a burglary that was an “inside job” b/c of conversation b/w agent and insured. But it was not
reasonable, as insurer argued, that coverage would be denied based on policy’s definition of
“burglary,” which excluded coverage if there were no marks left on the exterior of the
building. There was extensive proof of a 3d-party burglary - this was not an outside job. The
reasonable expectations of the policyholder is that this would be covered. The exclusion was
never read to or by the policyholder. The insurer’s agent didn’t explain the exclusion to
policyholder, and the burglary definition is inconsistent with lay understanding. Held: for
policyholder.
ii. The insured is not bound by unknown terms which are beyond the range of reasonable
expectations
iii. Min. Rule - only 10 states have adopted the doctrine in insurance cases
d. Doctrine of Implied Warranty
i. C&J Fertilizer (5-4) (3 of the maj. judges held that the insurer breached the implied warranty of fitness
by drafting the language of the policy to be inconsistent w/ the broad purpose of the policy
(“merchandized protection”)
i. Analogizes an insurance policy to a product - insurer breaches implied warranty of
merchantability when the “product” doesn’t perform as promised. Most consumers don’t
understand the details of how a car works, but they do expect reliable transportation.
Similarly, most consumers don’t understand how an insurance policy works, but they do
expect it to provide reliable protection when needed.
ii. Criticism of extending the doctrine. A warranty gives a cause of action to 3d parties. Should
an insurance policy do the same? If a medical insurer failed to provide benefits to an insured,
would the doctor have a cause of action against the insurer?
iii. Note that there are no implied warranties in an insurance contract  implied warranties
come from common law contract principles.
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iv. A 2000 Tex. App. Ct. decision declined to extend the implied warranty for good and
workmanlike performance to servs. provided by life insurance companies.
e. Doctrine of Unconscionability
i. C&J Fertilizer (provision defining “burglary” as requiring “visible marks” or “physical damage” to
exterior premises at place of entry was unconscionable)
ii. Factors when considering unconsionability: assent, unfair surprise, notice, disparity of bargaining
power, substantive unfairness
iii. C&J analysis: (1) the insurance policies were not in front of the policyholder and insurer’s agent when
the coverage was purchased. (2) Although the agent pointed out that there had to be visible evidence of
burglary, the insured was not told that the policy would require visible marks or physical damage to
the exterior of the premises at the place of entry. Therefore, it was fair for the policyholder to assume
that only the existence of visual evidence of a bona fide burglary was necessary to show that it wasn’t
an inside job. (3) The unconscionable provision was in fine print, and the placement of the provision
was suspect b/c it wasn’t place in the “exclusions” section. (4) Insurer offered no evidence to support a
conclusion that the provision defining "burglary," considered in its commercial setting, was a
reasonable limitation on the protection offered, or should reasonably have been anticipated by the
operator of the fertilizer plant.
i. Min rule - almost never used in insurance cases
iv. Dissent in C&J: There’s a legitimate purpose of requiring visible marks (prevents coverage for inside
jobs). It’s true that some cases will be unfair at the margin, but that doesn’t justify judicial lawmaking.
f. Waiver - where a party voluntarily and unilaterally gives up a legal right. The waiving party must (1) be
aware of the right being waived, and (2) [objectively] intend to give up the right.
i. Ex: if insurer accepts a premium payment, knowing that it’s been paid late, then insurer
waives the right to later deny a claim based on late payment even if insurer takes payment to
bank and says not waiving right to cancel coverage.
g. Estoppel - one party’s acts/representations reasonably induce detrimental reliance on the part of another.
i. Ex: if insurance agent assures a policyholder that her insurance won’t lapse if she pays her
premium 1 month late, and policyholder relies, the insurer will be estopped from claiming
the policy didn’t cover a loss that happened during that period
II.
Agents/Brokers
a. Issues Which Arise
i. There is often a close factual connection between claims or defenses based on waiver, estoppel, or
misrepresentation and the potential liability of an insurance intermediary.
ii. If a policy holder loses coverage because of the misrepresentation or is unsuccessful in obtaining
coverage through waiver or estoppel, the insurance intermediary is the logical target.
b. Questions to Ask In Cases Involving Intermediaries
i. Are the acts or omissions of the intermediary binding on the relevant insurance company?
ii. If yes  do those acts or omissions form the basis for a waiver or estoppel?
iii. Is there any basis for holding the intermediary legally responsible for the harm that results
c. Promissory Estoppel To Avoid Restrictions on Coverage.
i. Darner1 - uses reasonable expectations doctrine to justify application of equitable estoppel  won’t
enforce boiler-plate terms which are neither negotiated nor read by the parties to limit coverage that the
parties expressly agreed upon
ii. Exception to parol evidence rule (which generally excludes extrinsic evidence if contract is integrated):
circumstances surrounding the insurance contract’s formation (negotiations and prior dealings w/
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Darner Motors bought auto liability risk insurance through insurer’s agent, Doxsee. The umbrella policy covered DM 100 per
occurrance/300 aggregate for all injuries from one accident; and the lessees of its cars in limits of 15/30. Insured didn’t know the
lessee coverage was only 15/30 until it was time to renew. Darner told Doxsee that the limits didn’t conform to their prior agreement;
Doxsee told Darner not to worry b/c the all-risk clause of the umbrella would provide add’l coverage up to 100/300. After Doxsee’s
representations of coverage, insured failed to read the policy. Later, one of Darner’s lessees hit a pedestrian, who looked to insurer
for coverage over 15/30 limits. Insurer defended on grounds that the umbrella policy defined “insured” to exclude lessees.
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insurer’s agent) are admissible to determine whether the 4-corners of the policy controls or if the parties
agreed upon broader coverage
iii. Darner is the minority rule - Most courts have ruled that estoppel is not available to expand the
coverage of a written policy so as to protect the insured against risks expressly excluded
a. Rationale: court can’t create a new contract for the parties; an insurer shouldn’t be required by
estoppel to pay a loss for which is collected no premium.
d. Under the Minority Rule In Darner, there is Reformation –
i. If form provisions are different from the bargained deal or contrary to the dominant purpose of the
transaction, those provisions are not part of the agreement.
e. No Estoppel Where PH Claims Agent Induced It To Buy Coverage.
i. Even courts like Darner don’t apply estoppel to promises that induced the insured to buy coverage.
Roseth - adjuster didn’t contradict policyholder’s mistaken belief that he had coverage for calve that
were injured but not killed. Held: estoppel is unavailable to expand terms of the policy.
ii. Before coverage is purchased, estoppel does not apply.
III.
Underwriting/ Nondisclosure
a. Process
i. When one buys insurance, she must fill out an application.
b. Duty of Intermediary to Ensure Policy Meets Insured’s Needs:
i. Basset - insurance broker was negligent in obtaining a homeowner's policy that excluded coverage of the
policyholder’s daycare business. A broker is bound to exercise reasonable skill and diligence in the
transaction of the business entrusted to the broker. The broker failed to take reasonable steps to ensure
that the policy it sold was adequate for insured’s needs. The insured's failure to read the policy—which
didn’t cover business pursuits—was not an absolute bar to her claim).
c. Materiality
i. If a carrier asks a PH a question before the contract “on knowledge and belief,” that question is
considered “material.”
ii. What happens if the IC does not ask a question? (For example the PH has a rare disorder and wants life
insurance but IC does not ask).
i. It has been traditionally difficult for IC to avoid performance b/c of misstatement on application.
iii. Golden Rule v. Schwartz:
i. Where a health insurance application asked if the applicant had insurance coverage available
under other policies, and the 23-year-old insured did not believe that he could be insured as a
dependent under his parents' policy (but in fact such coverage was available), the PH's response
had to be assessed in light of his actual knowledge and belief. Since the insured genuinely
believed that no other coverage was available, his misstatement did not provide grounds for
rescission.
iv. If an IC asks about a particular subject matter, it is conclusively presumed material. Sometimes, the
insurer can prove that the insured intentionally concealed a material fact by showing that the information
withheld is obviously material.
v. Materiality is not measured by the event or condition that is concealed.
d. Representations and Warranties
i. Warranty
i. A warranty must be absolutely and strictly complied with.
ii. If PH warrants she has not smoked within the past year and she has smoked one cigarette, this is
an absolute forfeiture.  concealment. (requires intentional, fraudulent behavior.)
a. Some courts say PH must have specific intent to defraud.
iii. Insurer can raise defense of falsity if applicant’s answer while appearing to be complete is
partial.
ii. Representation
i. Even if innocently made, can serve as the basis to void an insurance policy. What the [insured]
in fact believed to be true is the determining factor in judging the truth or falsity of his answer,
but only so far as that belief is not clearly contradicted by the factual knowledge on which it is
based).
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ii. Misrepresentation does not mean absolute forfeiture.
iii. Appears in the context of IC asking question  nondisclosure in response to a question is a
misrepresentation.
iv. Consent is required to prove concealment.
IV.
Notice Obligations
a. PH Duty to Notify IC
i. PH have an obligation to notify the IC if something goes wrong and they need them to pay
b. The Two Types of Notice for Liability Policies
i. Notice of Occurrence
i. Must notify company that the accident happened as soon as practicable
ii. This occurs when the PH has not yet been sued and therefore doesn’t cause prejudice
iii. Should include the insured, and reasonably obtainable info w/r/t time, place, and circumstance.
iv. If you have an excess, most require PH to also give them notice and not just to the underlying
but only when it’s reasonably likely that the claim will trigger excess.
ii. Notice of Claim or Suit
i. This must occur immediately
ii. Has to forward every demand, notice, summons, or other process.
iii. In some cases involving large corporate insureds, IC has argued the PH has failed to “tender the
defense” (formally ask that insurer perform). Mayerson says this is unnecessary b/c they already
have a duty to defend.
c. Two Questions to Ask:
i. Did the PH give timely notice?
ii. If not, has the insurance company been prejudiced from the PH’s late notice?
i. This might translate into a question concerning which party in a lawsuit has the burden of
showing prejudice or not.
ii. In some states, carrier has burden of showing it was prejudiced.
a. This is difficult b/c hard to know whether prejudice exists.
b. Further, there are contract doctrines to deal with this  if a party violates the contract, what
happens?
c. If someone breaches a contract in a minor way (like this perhaps is), the counterpart is not
excused from performing but rather has recourse to some modest damages.
iii. Technically, PH can lose coverage by not giving timely notice, but generally there must be prejudice.
d. Related Contract Issues
i. A condition is that which if not performed causes the other parties contractual obligation to not mature
 must comply with condition to trigger other party’s obligation.
ii. A covenant, if not performed, triggers the question of whether the breach was material and only if it is
material does it mean the other party’s contractual obligation is not mature.
e. Modern Trend  Less Favorable to Large Corporate PH’s
i. Some courts have found than an insured effectively waives its right to recovery for pre-notice costs,
including defense costs, without requiring an insurer to prove prejudice
ii. Impairing Insurer Opportunity to Investigate an Occurrence:
i. Steelcase: there was no coverage b/c the insurer was prejudiced by corporate policyholder’s late
notice of an environmental claim where insurer was not given the opportunity to inspect a
leaking underground storage tank that was removed and destroyed before the insurer gave
notice. (Mayerson: the court presumed prejudice and didn’t care that policyholder had hired an
independent lab to inspect the tank and gave the insurer lab’s report)
iii. Denial of Coverage For Failure To Notify Insurer Of “Occurrence.”
i. Olin a. July 1979: Olin is sued in a number of bodily injury and cleanup cases involving its DDT
plant
b. Mar 1980: Olin notifies 2 of its insurers of the suits (from July 1979).
c. Nov. 1981: Olin discovers that it was also covered by a 3d insurer, Hanver, and notifies
Hanover
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d. Dec. 1982: A second wave of DDT suits is filed. Olin promptly notifies all 3 insurers.
e. Court denied coverage for 2d wave suits b/c of late notice of the initial occurrence. Insured
isn’t allowed to give late notice just b/c it lost the relevant policies. Court did not consider
whether Hanover would’ve done anything different had notice of the first wave of suits been
immediate.
First Party Property Insurance
I.
First Party Property Insurance
a. Basics
i. Covers your interest in property that you own as opposed to “liability insurance” which covers liability
you might hold as the result of causing damage to someone else’s property.
b. What it Covers
i. Your Property
i. Typically requires physical damage to property
ii. Business Interruption
i. Business interruption while repairs are being made
ii. Ingress / egress provisions can be added to this part of the policy.
iii. Extra-expense
i. Would cover cost of setting up a new locating during repair
c. Making Out a First Party Property Claim (General Mills v. Gold Medal)
i. PH must prove:
i. Peril:
i. Third party negligence
ii. Loss:
i. A direct physical loss
ii. Covered property
iii. Valuation
i. Determine the value of property
ii. Some say actual cash value (less depreciation in the form of wear and tear)
a. Market value
b. Replacement costs – depreciation
1. An element to be considered among all relevant factors in broad evidence rule.
c. Broad evidence rule – use all relevant evidence to determine howmuch you actually lost.
1. Occurs at time of loss (not before you buy policy)
2. Zochert: court looked at size of building, age and state of preservation, what
materials it was made of, how much it would sell for, rental location, etc. when
determining actual cash value of building which burned down.
3. Mayerson thinks this rule is unworkable.
ii. General Mills v. Gold Medal Ins.
i. “Direct physical loss” can exist without structural damage to property. (property rendered
valueless in US b/c of federal regulation).
i. GM’s oats were sprayed with an unapproved pesticide, barring it from sale under FDA
regulations, even though the pesticide was not toxic and the oats were safe for human
consumption. Note the spraying was a physical act.
ii. Loss was covered b/c the oats legally could not be used in General Mills's business of
“manufacturing food products… conforming to the appropriate FDA regulations.”
iii. The presence of the pesticide constituted “an impairment of function and value sufficient to
support a finding of physical damage.”
iv. Gold Medal was GM’s captive insurer. Gold Medals’s denial of coverage was strategic - GM
wanted to directly access its reinsurer collectibles.
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II.
All-Risk
Provide coverage against all risks of direct physical loss or damage to property insured and described by policy,
unless the specific risk is excluded.
a. PH must Prove
i. A change in the property (i.e. a loss)
b. Policy Language
i. E.g. in Homeowner’s Insurance Policy: “risks of physical loss”.
ii. Coverage usually extends to risks not usually covered under other insurance, and recovery will be
allowed for all fortuitous losses, unless resulting from misconduct or fraud or a specific provisions
expressly excludes the loss from coverage event
iii. Purpose: insure losses when the cause of the loss is unknown or the specific risk was not explicitly
contemplated by either party.
iv. Sometimes PH thinks policy covers ALL loss, but it only does if the expectation of coverage is
reasonable in light of the actual policy provisions or if there was a promise of coverage that the insurer
may have induced.
v. Recovery under an ‘all-risk’ policy will, as a rule, be allowed for all fortuitous losses not resulting from
misconduct or fraud, unless the policy contains a specific provision expressly excluding the loss from
coverage.
III.
Named Peril
a. PH must Prove
i. PH must match up the loss to the named peril
ii. PH has the burden of proving a change in the property (i.e. a loss) and that the loss came from the named
peril.
b. Policy Language
i. Will list out the perils (wind, fire, etc.)
IV.
Fortuity
a. Definition
i. “By chance”  Fortuity arises from the idea that insurance covers risks, rather than losses that were
planned, intended, or anticipated by the insured.
ii. Fortuity is a requirement  requires that the IC cover risks, rather than just planned, intended, or
expected losses.
b. Relationship to Liability Insurance
i. Note that in most GCL policies, there is protection against certain “intentional torts” which might seem
to suggest that resulting losses are not caused by fortuitous evens and are therefore uninsurable.
ii. BUT coverage does not violate concept of fortuity because while the intent to act is an element, the
intent to injury is not.
c. Compagnie des Bauxites v. Ins. Co. of North America (1983)
i. The company bought a crushing machine and had insurance on it.
ii. Machine delivered was different from design specs the IC believed the machine would have.
iii. Once machine was delivered, failure was inevitable because of incorrect design.
iv. The machine failed, Baxuite attempts to recover under First Party Property Insurance and company
denies claim on the ground that at the time they were insuring, it was an inevitability that the machine
would break down b/c of incorrect design.
v. Third circuit found that while this damage might not be “fortuitous” to someone with full knowledge, but
it was fortuitous to Bauxite and the IC b/c neither knew machine was going to fail.
vi. EVEN if Bauxite knew it would fail, there was still fortuitous risk b/c they don’t know when.
vii. In the 1st PP policies there is all risk or named peril—if all risk then risk was the manufacturer’s
negligence.
viii. IC sues third party go get back the money they had to pay out to Bauxite  this is called subrogation. It
is an assignment of Bauxites “chose m action” (or claim).
d. Collateral Source Rule
i. In A’s claim against B, A’s purchasing of insurance does not lessen B’s liability.
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ii. Could lead to double recovery unless IC puts in K that PH has to remit payment back to IC if they’re
paid in a suit after IC has already paid them. (This is the principle of indemnity).
iii. If IC doesn’t do this, oh well.
V.
Appraisal
a. How it Works
i. In many property-insurance policies, a party has a right to demand an appraisal, which is procedure in
which the value of lost or damaged property is determined.
ii. Typically, an appraisal takes the form of what I call a 1 + 1 + 1 structure – each party appoints its own
appraiser, and if the two party-appointed appraisers cannot agree on a number the two together then
select an umpire (or a court will select an umpire to decide if the two cannot agree on one).
iii. That some form of alternative dispute resolution is used for valuation, however, does not mean that there
is no room for judicial intervention in disputes involving insurance policies with appraisal provisions.
b. Disputes that Arise
i. Litigated disputes concerning appraisal sometimes involve the proper scope of the appraisal proceeding,
because appraisers determine only questions of valuation and not questions of “coverage,”
ii. Some disputes involve whether the appraisal provision has been waived by one side’s dilatoriness in
invoking it.
iii. Another type of dispute concerning appraisers centers on whether the appraiser or the umpire met the
requirements of the qualifications clause in the policy or was otherwise an inappropriate appraiser (or
umpire) for the dispute.
c. Merrimack Mut. Fire. Ins. Co. v. Batts
i. An appraisal clause in a policy is not an agreement for binding arbitration.
ii. Appraisal vs. Arbitration
i. Appraisers cannot decide questions of coverage or liability
ii. Arbitration is a private ADR process that has final, legally binding conclusions. Arbitrators must
meet together at hearings, take evidence, adjudge matters based only on what is presented to
them in the course of adversary proceedings, and otherwise act quasi-judicially
iii. Appraisals only quantify the monetary value of a property loss and do not decide questions of
liability, policy interpretation, or scope of coverage. Appraisers act independently and apply
their own skill and knowledge in reaching their conclusions.
a. Insurer can still argue exclusions apply
VI.
Business Interruption and Extra Expense Coverage
a. Business Interruption/Extra Expense Coverage
Coverage for Interruption in Business due to a Fortuitous Event
i. Reimburses insured for lost profits and continuing fixed expenses during period of restoration,
i.e., when a business is shut down or temporarily operating elsewhere b/c of damage to its
premises.
a. Lost profits is calculated using the insured’s business records/ prior performance.
b. When is period of restoration over? When store is back up and running or when
economy has improved?
ii. Must be triggered by damage from a covered peril (under the 1st party property insurance)
i. Generally requires some physical damage to property. If loss is not covered b/c of
an exclusion, then insured is not entitled to BI coverage
b. “Contingent” Business Interruption Coverage
a. Policy to protect against business interruption in the absence of actual physical property damage.
b. Typically, only those hazards that are insured against w/r/t the insured’s own assets qualify as covered
events when they befall the insured’s supplier or the insured’s customer
ii. Chicago flood case: tenants on the upper floors of a building were denied coverage where only the
building’s lobby was flooded, impeding access to their property, b/c and no physical loss occurred to
their own property as to qualify them for business-interruption coverage.
c. Causation & Concurrent Causation
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a. Default legal rule: if either cause or both causes are sufficient to cause the loss, then the loss is
fully covered.
1. Ex: Insured owns a house that’s destroyed by wind, rain, and flood. Homeowners policy
covers risks of physical loss except for flood. So it covers the wind damage.
b. Some policies say: if there’s an excluded cause + covered cause  no coverage
1. Some states uphold: right to contract to where IC does not have to cover if house
destroyed by 2 causes, 1 covered, 1 not.
2. Some state rule for policyholder.
ii. Fountain Powerboat Indus. Inc. v. Reliance Ins. Co.
i. Insured (boat manufacturer) filed a business interruption under its policy’s civil
authority and ingress-egress coverages. Insurer argued coverages did not apply in the
absence of physical damage to the policyholder's own premises. Policyholder countered
that while an ordinary business-interruption loss might require physical damage to
insured property, the clear terms of the ingress-egress coverage contained no such
requirement. (“This policy covers loss sustained during the period of time when, as a
direct result of a peril not excluded, ingress to or egress from real and personal property
not excluded hereunder, is thereby prevented.”)
ii. Held: policyholder’s loss, which resulted from “the inability to access the Fountain
facility and resulting from a hurricane, constituted a “covered event with no damages
[or] physical damage to the [insured] property required.”
iii. The civil-authority provision, which preceded the ingress-egress provision in Fountain's
policy, also did not require physical loss to insured property, a fact that “bolstered” the
court's conclusion on ingress-egress coverage.
iii. When does BI coverage end? When the insured’s physical space has been repaired and the
business can reoccupy the building? What if utilities haven’t been restored?
i. Insurers argue: when you were able to receive business
ii. Mayerson: when profits have been restored
d. Extra Expense - covers cost of setting up new location
i. Higher costs are covered (e.g., b/c temp premises is located in higher rent area)
e. Civil Authority coverage –
i. If insured does not have covered property loss, may still be covered if she has:
ii. Access to the property must actually be specifically prohibited by civil order, not just made more
difficult or less desirable. Couch.
f. Ingress/Egress coverage
i. Elements:
a. Ingress to/ egress from insured property is prevented;
b. By a covered peril; and
c. A direct loss results.
ii. Foutain - Ingress/egress coverage was triggered despite the fact that the insured property did not
sustain physical damager. Court concluded that the parties intended coverage not only when the
property itself was inaccessible, but also when the only route to the business caused the property
to be inaccessible.
iii. All routes blocked off might be required*
g. Subrogation
i. When an insurer pays a policyholder’s claim, the insurer sometimes seeks to off-load that
payment “vertically”, that is, by suing other einsurance companies that issued lower-layer
coverage, or “horizontally”, that is, by suing other insurance companies that issued coverage in
other policy periods.
ii. Insurer sues the other insurers under the theory of equitable subrogation (insurer “steps into the
shoes” of the policyholder and pursues the policyholder’s chose in action against the
nonperforming insurer.)
iii. Under the “made whole” or “make whole” doctrine, an insurer pursuing a subrogation claim
retain the recovery unless and until the policyholder’s loss has been fully indemnified.
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iv. Thus, in the event the policyholder’s loss exceeds the combined limits of all its coverage, that an
overlying insurer has performed and sued a recalcitrant underlying insurer does not mean that
that insurer is able to pocket the money from the nonperforming insurer.
v. Instead, as should be reasonably obvious, the policyholder would be entitled to receive the
money from the non-performing carrier, even if the overlying performing carrier is the one
that brought suit.
vi. If the performing carrier succeeds in this suit, then the only consequence to the policyholder
should be that the underlying carrier’s payment is to be debited against its policy limits, and the
limits of the performing carrier should be refreshed (to the extent that the policyholder has been
fully indemnified and there is money left over from the proceeds from the underlying carrier).
Liability Insurance
I.
Structure of a Liability Insurance Policy
a. Definition
i. Liability Insurance covers the PH against the risk that she will be found liable to someone else.
ii. General Liability Policies cover (1) bodily injury and (2) property damage (3) during the policy period.
iii. The PH has to demonstrate that the loss arises from BI or PD
iv. This begs the question  what is bodily injury?
b. History
i. Since 1941, there has been a standardization of liability policies in order to make insurance more
efficient and useful.
ii. In 1986, the “Commercial General Liability” (or GCL) policy became standard.
c. Terminology
i. Declarations:
i. Includes limits of coverage for each type
ii. Each occurrence limit = limit per accident
iii. General Aggregate limit = maximum amount of money one can get out of the policy,
regardless of occurrences.
iv. Products/Completed Operates Aggregate Limit = amount for products liability
v. N.B.  the limits can be “amended” at later pages of the policy
ii. CGL Coverage Form
i. Lists the types of coverage and exclusions by section
ii. Duty to Defend and Indemnify listed in each section
iii. Exclusions apply to the section they are found within.
iii. Supplementary Payments Provision
i. Deals with what the insurer pays in fulfilling its duty to defend.
ii. Insurer pays all associated expenses with regards to any claim or “suit” it defends
iii. Expenses are attorney’s fees, etc. and are distinct from damages.
iv. Supplementary Payments do not reduce the limits of insurance.
iv. Limits of Insurance
i. To the extent insurer pays expenses to fulfill the duty to defend, this does not come out of
the general aggregate limit.
v. Schedule of Underlying
i. Will show in which order the “stack” of excess insurers is in.
II.
Bodily Injury and Trigger for Occurrence Policies
a. Definition
i. Answers the question of what must happen during the policy period for the insurance policy to be
involved  even if there is an exclusion later on. This refers to the PH’s prima facie case and their
initial burden of proof.
ii. Trigger refers to the point at which the “loss” or “harm” occurs such that the policy becomes effective
and IC pays or defends.
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iii. There must be bodily injury or property damage to trigger the policy  the year the “event” takes
place triggers that year of the policy.
iv. This can be complicated with things like mesothelioma, etc. where there is not a known date of
“trigger.”
b. Types of Trigger
i. Exposure Theory of Trigger
i. All CGL policies triggered
ii. “Bodily Injury” occurs at the time of exposure
ii. Manifestation Theory of Trigger
i. Bodily Injury occurs when there is a manifestation of it
iii. The Tripple Trigger / Continuous Trigger
i. First exposure (injury at cellular level); Physical Response; Injury Every Day until Treated
at which point trigger stop.s
ii. Every insurer on the risk from the beginning of the exposure period until manifestation is
required to defend the insured. Does not distinguish between bodily injury caused by
inhalation exposure, exposure, and manifestation. Most often, the insurers divide the burden
based upon number of years.
iii. Asbestos cases: many courts have said that victims’ first exposure triggers policy b/c there’s
cellular inflammation (physical response that wouldn’t have occurred but for exposure), and
that as long as there are asbestos fibers in victim’s lungs  injury/ trigger every day. Once
treated, the trigger stops
iv. The Law
1. Some form of bodily injury in fact ends up being the law in cases involving
chemicals, medical devices, etc.
2. We conclude, therefore, that inhalation exposure, exposure in residence, and
manifestation all trigger coverage under the policies. We interpret "bodily
injury" to mean any part of the single injurious process that asbestos-related
diseases entail.
iv. In-Residence Theory
i. Somewhere between exposure and manifestation
ii. Injury in fact
III.
Property Damage
a. Prong One
i. Physical damage to tangible property (e.g. contaminant in well water)
b. Prong Two
i. Loss of use of tangible property that has not been physically injured
ii. This includes purely economic loss (see economic loss doctrine)
iii. Hartzell Industries Inc. v. Federal Ins. Co.
i. Hartzell Industries, Inc. v. Federal Insurance Company, 168 F. Supp. 2d 789 (S.D. Ohio 2001) is
a case where the insured brought an action against the insurer, seeking indemnification of its
liability in an underlying action. Hartzell supplied the Allegheny Power Company with seven roof
fans to cool its boiler house. The propellers on one of the fans disintegrated and Allegheny shut
down all the fans as a precaution; this led to lost worker productivity due to the hot work
environment attributable to the lack of functioning roof fans. The power company filed a lawsuit
against Hartzell for damages, and Hartzell tendered the claim to Federal. Then, the dispute over
coverage began.
ii. Hartzell said that there was a property damage claim because Allegheny lost the use of tangible
property—its boiler house—even though that tangible property was not physically injured.
Federal countered that Allegheny did not lose the use of its boiler house as a result of the fan
failure, but merely lost the use of the fans; and, since the fans were the only tangible property that
could not be used, the insurer said that Hartzell could not establish property damage based on the
loss of use of tangible property that is not physically injured. Federal also said that Allegheny's
alleged damages resulting from reduced worker productivity due to heat in the boiler house are
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purely economic losses which do not constitute the loss of use of tangible property. The court
found Federal's arguments to be unpersuasive.
iii. The district court noted that Allegheny's complaint against Hartzell was that its boiler house
became too hot as a result of the inability to use Hartzell's roof fans. This, the court found,
qualified as a covered loss of use of tangible property that is not physically injured. The boiler
house became less useful because the fans were turned off and this resulted in a loss of
productivity for Allegheny. This loss of use constituted property damage as defined on the CGL
form.
iv. PH = fan company
v. 3P = Boiler House
vi. IC = Fed Ins Co.
vii. Factory buys fans to cool the building. If the fans do not work, the workers in the factory cannot
work.
viii. If a fan broke and hurt a worker (bodily injury) or took out a wall (property damage), you would
have prong 1 damage.
ix. P, buyer of fans, sues D (fan maker) claiming lost productivity (prong 2 damage) b/c fan does not
work.
x. The court found for the plaintiff, claiming that the defendant tortuously manufactured bad fans.
xi. Damages are measured by loss of productivity by the loss of use of workers, which is covered by
property damage.
xii. Impaired property = boiler house. Hartzell’s fan = insured’s product.
xiii. Exceptions to the exclusion (3(c), supra): insured is covered if the loss of use of other property
[boiler house] arises out of the sudden and accidental physical injury to insured’s property [fan],
after it [fan] has been put to its intended use
xiv. “Sudden and accidental” means the injury happened immediately and was “unexpected or
unintended” from the standpoint of the insured
xv. Held: “loss of use” damages against insured are covered under the “sudden and accidental
physical injury” exception to impaired property exclusion. The fan blades disintegrated after
being installed to cool the boilerhouse (and the blades didn’t injure anything). As a result, the
boilerhouse was too hot for use.
c. Liability Issues
i. Economic Loss Doctrine
i. Under the economic loss doctrine, defendants are only liable for ex contractu liability
ii. D is not liable for non-economic damages arising from ex delicto (tort) liability
iii. This issue arises when a Defendant is held liable for money and we’re determining the basis
of the insurer’s performance relative to the defendant.
IV.
Duty to Defend
a. Standard, Termination
i. An IC has a duty to defend if there are allegations in the complaint against the insured which permit
proof of a claim that, if proven at trial, would be covered by the insurer’s duty to indemnify for
judgments or settlement.
ii. Courts sometimes use the “Eight Corners” rule  overlay the insurance policy and the tort complaint
against the PH and see if there is an overlap
iii. The amount the insurance company pays under the Duty to Defend is called “supplementary
payments” under most policies.
b. Timing of Defense/ Stay of Indemnity
i. The DTD is seen to arise at the outset of the tort case. Then, see what happens in tort case to
determine whether it’s a judgment or settlement that would be covered.
ii. Typically runs through the judgment in the tort case and should arguably run through any appeal of the
tort case.
iii. There are loyalty issues here, discussed infra.
iv. Confine the Claim Rule
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i.
If the claim that is potentially covered is knocked out, and only uncovered claims remain,
the IC no longer has a duty to defend.
ii. This ONLY happens when there is NOTHING left to which indemnity might attach.
c. Recoupment
i. If the plaintiff wins the case against the defendant, yet the insurance company has already paid the
plaintiff for their loss, the injury party should pay back the insurance company.
ii. There are typically recoupment provisions in the policy.
iii. Two-Fer Rule
i. This problem arises when the insurance company, in fulfilling their duty to defend also
spends time working on potentially non-covered claims as well. The essential question is, if
the lawyers spend time reviewing something does the insurance company pay for all of their
time or only the time spent reviewing covered issues.
ii. The rule: if you do work for the covered count, it is 100% covered.
iii. If work benefits the covered count that “incidentally benefits” the uncovered count, this is
irrelevant for the purposes of insurance recovery.
iv. IC and PH-Defendant can fight it out, or IC and Plaintiff can fight it out.
V.
Duty To Indemnify
a. Definition
i. The insurance company must pay for judgments against the PH on covered claims.
b. Timing
i. The Duty to Indemnify should not be litigated until the underlying case is over, because until then,
there is no way to know whether there will be a duty to indemnify.
c. Issues that Arise with the DTI
i. What is the Trigger of Coverage?
i. This is relevant for the DTD and DTI to know what years’ policy we’re discussing.
ii. If more than one year’s policy is triggered, the next question is: how much does the insurance
company pay?
i. What if there are multiple carriers?
ii. What if there is more coverage in certain years?
iii. What if there is more excess in a certain year?
a. Issue of Horizontal Exhaustion: all primaries must pay out before excess carriers pay
i. Pro rata approach. Policyholder often is liable for its own share for any years during
which it did not carry insurance.
ii. The most common method allocated liability according to each insurer’s time on the
risk:
# months Insurer X covered the risk
Total time of all coverage
iii. Other methods:
iv. Number of policies/ per capita
v. By quantum of the injury
vi. By limits – Insured buys insurance from a different primary insurer in each of 3 years. In
Y2, insured buys policy w/ much higher limit that in Y1 or Y3. This approach requires
insurer in Y2 to pay more than the Y1 or Y3 insurers.
vii. Owens-Illinois held that allocation must be based on a formula that considers: policy
limits, years of coverage, exclusions, and periods of self-insurance or no insurance.
(asbestos claims)
viii. Derived from the position that the “all sums” language is subject to the “within the
policy period” language and that insurance must be allocated by “time on the risk.”
i. Goodyear Tire & Rubber Co.
ii. Insured is entitled to secure coverage from a single policy of its choice that covers "all
sums" incurred as damages "during the policy period," subject to that policy's limit of
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coverage. (Background: insured sought coverage for cleanup costs arising from
environmental pollution  continuous occurrence, triggering multiple primary insurers)
iii. Rationale: that there was nothing in the triggered policies that provides for a reduction of
the insurer's liability if an injury occurs only in part during a policy period. Therefore,
Goodyear reasonably expected complete security from each policy that it purchased.
iv. The insurers are responsible for obtaining contribution from other applicable primary
insurers
2. Issue of Vertical Exhaustion: All money available from primary and excess within a particular
policy layer is exhausted first.
i. Joint-and-several approach. Policyholder may select any triggered policy period, and
that policy period’s limits are applied to the claim. So long as the selected policy period
has adequate coverage, the policyholder is indemnified in full for the claim, regardless
of whether the policyholder had periods of no insurance during other policy periods
ii. Derived in part from language in CGL policies that requires insurer to pay “all sums
which the insured shall become legally obligated to pay because of bodily injury to
which the insurance applies.”
iii. When multiple carriers are involved:
i. Pro-Rata Theories: can pro-rate by quantum of relative injury in each year;
ii. can pro rate by number of policies per capita;
iii. can pro-rate by amount of limits (do a weighted approach where the company who gave
more coverage should pay more.)
VI.
Approaching an “Occurrence Injury” Problem
a. Make a Coverage Chart Including
i. Beginning dates
ii. End Dates
iii. Primary/Excess Insurance
iv. Determine which contract governs what period and what dollar amounts
b. Analyze the Particular Problem
i. Trigger?
i. In terms of the situation, what event happened during what policy period to activate the
coverage?
ii. Look at facts == determine when during period is operative event/events
1. Single event?
2. Long term?
3. What produced the injury/damage that's relevant?
ii. Once you have a trigger theory, make sure notice is given to insurance cos to satisfy covenant of
providing prompt notice
iii. Look at the duty to defend
i. Is there a suit?
1. Has suit been brought
2. Is it just an administrative action?
3. If there's a suit there is something to defend.
4. If there's something to defend, then --- tender the defense to the insurance company
5. This is a request that the insurance company perform
ii. Test: do the allegations in the suit permit proof of a covered claim?
1. Covered claim doesn’t have to be expressly articulated in the P's complaint (shouldn’t
necessarily control whether there is coverage).
2. But if event is such that coverage would apply, then duty to defend.
c. Allocation of Loss onto Coverage Chart
i. This only comes up if there is a trigger that extends through more than one policy period
ii. Then determine which theory to use (pro rata, good year, etc.)
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iii. This more so addresses the duty to indemnify
d. Then ask: how many occurrences?
e. Then: question of aggregates?
i.
Loss situation -- 2 occurrences -- but carrier doesn’t have 2 occurrences worth
of money left, then it cannot pay so the policy is exhausted and there's a short
fall
ii.
Can try to pop short fall to excess carrier
iii.
Or, rethink # of occurrences to try to make it work.
iv.
Question of aggregate means looking at hazards
1. Products/ completed operations aggregate
2. And general aggregate
a. Or this might be split b/w premises/operations; independent K'ers
v.
Under supplementary payments provision usually the defendant costs are not
limited by per occurrence limits
VII.
Number of Occurrences
a. Background
i. The question of the “number of occurrences” involved in mass-tort situations is important because
policy limits are expressed in dollars per occurrence, with some policies having unlimited or
uncapped retentions on a per-occurrence basis.
ii. For a policyholder with a large and uncapped per-occurrence retention, a ruling that each claim
against the policyholder is a separate occurrence results in multiplying the amounts retained by the
policyholder, oft times pushing insurance out of reach.
iii. On the other hand, for a policyholder with no or low retentions, a finding of multiple occurrences can
multiply the available coverage.
b. Additional Insurance Issues
i. The number-of-occurrences questions also will determine the responsibility of the primary- versus the
excess-layer carriers.
ii. A single occurrence in a mass tort situation means that the primary will pay one policy limit (plus
defense costs) and the remaining claims will be pushed up to the excess carriers. Sometimes, a singleoccurrence ruling can result in the policyholder’s picking up the cost of loss in excess of the top line
of its coverage.
iii. On the other hand, if more than one occurrence is found, the policyholder may be able to wring more
money out of the insurance program, depending on the aggregate limits of the coverage it purchased.
c. Deemed Single Occurrence. Lee Way - where a single event, process, or condition results in injuries, it will
be deemed a single occurrence even though the injuries may be wide spread in both time and place and may
affect a multitude of individuals.
i. Essentially if there’s one proximate cause, there’s one occurrence.
ii. Under excess umbrella policy, insurer agreed to indemnify for all sums which insured would be
obligated to pay for damages on account of personal injuries caused by or arising out of “each
occurrence.”
iii. Held: insured’s pattern and practice of discriminatory hiring constituted only one occurrence (as
opposed to a separate occurrence for each of insured’s 4 branches, or a separate occurrence for each
claim filed against insured); insured was required pay only one $25,000 deductible.
iv. It was not necessary that the wrongful conduct occurred during the policy period, but only that the
actual damage result during the period of the policy.
v. Later cases also held that multiple acts of discrimination or police brutality were one occurrence for
purposes of applying deductibles.
d. Deductibles & Number of Occurrences - amount the insured must pay for a given claim before the insurer
must pay
i. Insurer vs. Insured. Insurer wants highest number of occurrences if PH has to pay deductible on
each; PH wants lowest number.
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ii. Some courts determine the number of occurrences by examining the causative acts, not the number
of injuries or number of claimants.
iii. Owens-Illinois (1993) – Asbestos manufacture (policyholder) had $100k deductible. Held: the
“occurrence” was the insured’s decision to manufacture asbestos [continuous trigger]; rejected
argument that each claim made against the insured was an “occurrence”  policyholder pays
deductible 1x, insurers paid the rest.
iv. Met Life (2001) – held that each individual claim arises from a separated occurrence 
policyholder needed to pay $100k out-of-pocket for each claim; essentially no excess insurer had to
pay for any asbestos claims against primary insurer
v. Mayerson: courts are usually results-oriented in determining the number of occurrences
i. If there are 50 plaintiffs instead of 1, court may find there were 50 “effects,” even though
only one proximate cause.
ii. In Lee Way (above), some think the court would have ruled the other way if the peroccurrence deductible had been very low.
e. Limits & Number of Occurrences – policy limits defines the maximum that the insurer is obligated to pay
unless there are consequential or punitive damages.
i. Limits are usually on a per-occurrence basis.
i. Costs of defense don’t count against limits. Insurer generally must defend a claim until the
end of litigation, even if it’s willing to pay the entire policy limits to settle the claim.
ii. N.B.  the limits can be “amended” at later pages of the policy
ii. Aggregate limit – maximum amount the insurer will pay for all occurrences covered \
i. Most policies define their aggregates in relation to the hazard or peril
VIII.
Claims-Made Coverage
a. Claims Made Policies
i. In a claims-made policy, the policy is triggered when the claim comes in, rather than when the injury
occurs. This can mean that while an injury happened in year 1, year 2 of the policy is what is in effect
if that is when the claim came in.
ii. This makes claims-made policies inherently retrospective (vs. occurrence policies which are
prospective).
b. Trigger (Claims Made)
i. In a “claims made policy” the timing of the claim determines which policy year is implicated, rather
than the “time of injury.”  the trigger is the legal claim, not the damage associated with it.
ii. The question is, is whatever happened sufficient to give rise to the level of a claim.
i. E.g. a disgruntled letter from a client occurs in Y1 and a suit for malpractice occurs in Y2.
If the IC’s are different for each year, the IC for Y2 will argue the letter in Y1 is sufficient to
be a claim.
ii. The PH will obviously act in her interest, look to where she has more insurance, where there
are relevant exclusions, etc.
iii. When the policy is “triggered” the company then covers for the prior injury.
iv. A “retroactive date” means that the IC covers for claims filed w/in the policy period as long as the
injury did not occur X years ago.
v. As an alternative the IC can say they will not cover for claims On or before Jan 1, 20xx.
c. Claim Made and Reported
i. For this type of policy the claim must be made AND reported to the IC within the policy period.
ii. CM and Reported policies require as a matter of trigger both (1) the assertion of the claim against you
and (2) your providing notice to the insurance company of that claim during the policy period.
d. Relationship of Claims within a Series
i. Prior & Pending Litigation exclusion: coverage for claims from litigation that was pending prior to
the inception of the policy.
1. Found in most D&O liability policies
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2. Example: litigation pending against corporation—rather than individual directors—
prior to the inception of a D&O policy. If the suit was later amended (following inception
of the policy) so that it also names the firm's directors, then the exclusion would eliminate
coverage for the claim against the directors
3. Smith, Blocker & Lowther – Law firm was sued for malpractice 2x by one of its clients
arising out of the firm’s single failure to file paperwork w/ the IRS to get favorable tax
status as S Corp.
4. Suit #1: firm paid client out-of-pocket and didn’t report claim to insurer.
5. Suit #2: (filed 10 months after suit #1) firm reported claim to insurer (b/c it was for a lot
more money). Insurer denied coverage b/c the limits of liability section provided that 2+
claims arising out a single act, error, omission, or personal injury would be treated as a
single claim. Held: insured's failure to notify the insurer of the first claim did not bar
coverage for the second claim,
e. Notice and Lock-in
i. PH must give notice to IC when a claim is filed against her.  IC MUST RECEIVE NOTICE.
ii. For CM&R, PH must give notice w/in same year as claim is reported
iii. Notice Prejudice Rule:
i. Late notice is not a defense the carrier can use unless it can prove it was prejudiced by that late
notice.
ii. This is clearly inapplicable w/ CM&R policies, because those mandate reporting w/in the policy
year.
iv. Can have CM&R + (X) days for PH to report.
f. Laser Beam Exclusion:
i. If, at the end of the policy year, the IC asks PH if anything has happened which might give rise to a
claim, PH tells IC the situation but that they haven’t yet been sued, and then IC excludes that particular
situation from coverage for the next year.
ii. The PH does need to be honest  there are notice of circumstances clauses that can be put into Ks to
prevent laser beam.
iii. “If by the end of our policy period, you let IC know of circumstances that are likely to produce claims
in the future, IC will deem any subsequently asserted claim arising out of those circumstances arising
out of the date of the notice of circumstances.”  this locks in coverage even though policy has not
yet been triggered.
iv. Must tell IC who, what, when, amount of damages, etc for notice of circumstances.
IX.
Intentional Injury/ Expected-Intended
a. Definitions
i. In liability insurance, PH might not be covered for intended/expected-intended injury.
ii. Intended injury = not covered
iii. On a scale from unintended to intended, it goes from definitely covered to not covered (analyze this
way).
iv. Intended injury:
i. Acting with the purpose of bringing about the injury
v. Expected Injury
i. To act with the knowledge that injury is substantially likely/probable/certain to result.
b. Public Policy
i. Insurance exists to transfer the risk of tort liability.
ii. Policies, in the interest of public policy, cannot be construed to bar coverage for the exact risk you’re
buying insurance for.
iii. It is possible that a PH will not get coverage if the injury is so against public policy (moral hazards)
iv. We want to compensate victims and the insurer is the one with the money to do that.
c. Burden of Proof
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i. Language denoting intentional or expected/intended injury is incorporated w/in the definition of
“occurrence” (an accident resulting in injury neither expected nor intended from the standpoint of the
PH)
ii. Some courts place the burden on the claimant to show that the damage was not expected or intended.
iii. Most jurisdictions require actual, subjective intent in order to lose coverage because of
expected/intended injury
iv. There's a dispute in the case law if the expected/intended language is in the definition of occurrence
v. PH can show her conduct was not something that produced expected or intended injury
vi. Other courts say they won’t shift burden depending on where something is located on the policy and
will say just that this is in the nature of exclusion regardless of where it is in policy and the company
has the BOP
d. Criminal Acts
i. A defendant might not get insurance coverage if she acts intentionally in a way that is substantially
likely to result in injury.
ii. Someone can’t just break the law because she knows insurance will cover it.
e. Corporate Knowledge
i. Amicus Brief in Syntex
i. A corporation is a fictional construct which is meant to advance society’s interest.
ii. As such, it only has the mental state which the law attributes to it.
iii. The corporation exists independent of its owners, directors, etc.  as a consequence, no
particular individual embodies the corporation’s mental state for all purposes.
iv. In the insurance context, a corporation “expects or intends” damage only when the damage
is an expected or intended result of a corporate decision..
v. The proper standard for determining the corporation’s expectation or intention must reflect
the corporation’s mental state, and not just that of some employee.
vi. If management expected or intended injury you might can impute knowledge.
f. Coverage for Punitive Damage
i. For expected-intended, proof sufficient to establish punitive damages can be sufficient to establish the
injury was expected/intended (and therefore not covered) but this is not always true.
ii. Harrell - rejected an argument that to allow coverage for punitive damages would wrongfully shift the
burden of such an award to the public
1. Insurer could charge an additional premium to set up fund to pay for punitive dmgs
2. Or insurer could insert an exclusion for punitive damages
3. B/c negligent acts can result in punitive damages, to hold that the insurer doesn’t need to
indemnify the insured for such damages could lead to the financial ruin of someone for relatively
non-flagrant conduct
X.
Pollution Exclusion
a. Basics
i. The pollution exclusion is an exclusion to coverage for any liability for release of contamination or
waste.
ii. There are arguments about whether things are “waste” within the absolute pollution exclusion.
iii. E.g. carbon monoxide leak in an apartment building from the heating unit  is this w/in the PE?
b. “Sudden and Accidental”
i. There is no coverage for pollution UNLESS it is sudden and accidental.
ii. Majority of courts have interpreted “sudden” to mean quick, not unexpected.
XI.
Products Coverage
a. Definition
i. Products Liability exclusion bars coverage for certain elements of damage for which the manufacturer
of a component part is liable.
ii. “Property damage to “your produce” arising out of it or any part of it. (A as manufacturer should not be
able to transfer liability to B and buyer by contaminating B’s batch.)
iii. Exception to exclusion: if product damages a third party.
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b. Business-Risk Exclusions
i. A type of coverage that is often omitted from product liability insurance.
ii. Business risk occurs when a company manufactures or sells a product that does not meet the level of
performance that the company promises.
iii. For example, if a company advertises a product as having a life span of 10 months but the product only
lasts 6 months, the policy does not cover the company. It is sometimes referred to as "product failure
exclusion"
iv. Ice Systems of Am. (exclusion precluded costs associated with repairing ice rink so as to make it suitable
for hockey. Property damage (loss of use) was result of the insured’s incorrectly performing its work).
c. Impaired Property
i. “Failure to perform” exclusion  There is no coverage for injury to the product itself that only produces
economic loss.
ii. Selling hair dye that does not work  not covered; selling hair dye that dyes wrong color  covered.
iii. Consequences of bad products: covered
iv. The bad product itself: not covered.
v. THREE RULES REGARDING APPLICATION OF IMPAIRED PROPERTY EXCLUSION:
1. If the complaint fails to allege injury to other property, and merely alleges economic loss
resulting from injury to [or failure of] the product itself, the exclusion applies  no coverage.
2. If the complaint alleges or otherwise establishes damage to other property, the exclusion will not
apply  coverage
3. The exclusion does not apply to situations arising from a sudden and accidental injury to the
product which results in economic loss.
f.
Products-Recall/ Sistership
i. General Information
1. Bars coverage for the costs of withdrawing unsold and undamaged goods from inventory
when a potential product defect has been discovered. (Airplane is recalled b/c of discovery of
a problem  the cost of testing and altering its sister airships is excluded.)
2. Limitation: it does not apply where recall costs are claimed against the insured as an element
of third party damages.
3. Limitation: the principle that it is directed toward excluding the costs of preventative
measures and does not itself bar coverage for damages for actual injury or damage caused by
the defect in the product  only a withdrawal of a product triggers the exclusion.
4. So long as the insured’s product renders the “whole batch” practically worthless for intended
use, the sister-ship exclusion does NOT apply.
Other Commercial Insurance
I.
Directors and Officers Insurance
a. Coverage: D&O’s v. Company Liability
i. How corporations are structured, the directors and officers are not held personally liable for the
corporations’ judgments.
ii. One suing a director/officer can only get to them personally by “piercing the corporate veil.”
iii. However, corporations provide personal liability insurance for these officers and directors to ensure that
qualified people take the jobs.
iv. Some criticize this as against public policy because it undermines the reason we impose personal
liability on the directors anyways, but since the 70’s we’ve had this insurance.
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v. Under a D&O policy, the insurer does NOT have a duty to defend  it is the director’s responsibility to
hire the attorneys to defend herself.
vi. In order to fund this, insurer has a “duty to advance defense costs.”
b. Exclusions (must be final adjudication on case + liability for exclusions to apply):
i. Deliberate Fraud
ii. Criminal Act
iii. Corporate Advantage
iv. Abusing Corporate Power
II.
D&O Policies
a. Side A Coverage
i. Insurance Policies for Ds & Os provide coverage for defense costs and liability payments (judgments
and settlements) for covered wrongful acts if a claim is made against the insured during the policy
period (“Side A coverage).
b. Side B Coverage
i. Further, most polices give coverage for company’s own expenses incurred in indemnifying covered
persons pursuant to the corporate indemnity in company by-laws (Side B.)
ii. Usually, there is a deductible that applies to claims within Side B coverage, and D&O policies
typically seek to require that the company advance defense costs and make payment for any judgment
or settlement before the insurance company will pay.
c. A-Side Excess/Difference in Conditions (DIC)
i. A side excess is a separate policy that responds if: (1) there underlying limits are exhausted; (2) the
underlying rightly or wrongly denies coverage or is involvement
d. Side C Coverage:
i. Covers the corporate entity when claims are made against the entity in conjunction w/ securities it has
issued.  claims covered by this section of the policy usually result from a specific corporate action
that causes a drop in the market price of the firm’s securities.
e. Trigger:
i. Coverage is triggered by the assertion of a claim against covered persons or the company during
the policy period, but all claims relating to a particular factual circumstance (i) will be subject to a
single per-claim policy limit and (ii) regardless when asserted, will be assigned to the policy period in
which the first of any series of such claims was made.
ii. Typically, the covered persons and the company share a single policy limit for both the Side A and
Side B coverage (defense and indemnity combined).
f. Lock-In:
i. Moreover, D&O policies afford the opportunity to “lock in” coverage before claims are asserted in
the event that circumstances giving rise to future claims are discovered during the policy period and a
specialized form of notice to the insurer is provided during the policy period (but not after).
ii. If such notice of circumstances is provided, all subsequently asserted claims will be deemed to have
been made in the period that the notice of circumstances was provided.
iii. Correspondingly, later-incepting policies will automatically exclude coverage for claims made in the
period of their coverage to the extent the claims relate to a matter as to which notice of circumstances
has been provided earlier.
g. Deliberate Fraud
i. Policies exclude coverage for “deliberate fraudulent acts or omissions or willful violations of the law.
ii. Such exclusions are limited to claims where there is a “judgment or other final adjudication” adverse
to the insured person.
iii. It is conventionally thought that this “final adjudication” language means that if the underlying
liability action is settled rather than tried the exclusion does not apply.
iv. Some courts, however, have not limited these types of exclusions in this manner and permit the
adjudication of deliberate fraud to take place in the coverage case; in other words, the settlement of
the underlying case will not necessarily prevent the carrier from denying coverage on this basis.
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v. If punitive damages are not sought or are considered uninsurable in the circumstances and if the
company’s corporate indemnification applies, then the insurer will reimburse the company for its
indemnification (subject to deductible) without regard to the deliberate-fraud exclusion;
vi. if punitive/exemplary damages are sought and are indemnifiable, then the deliberate-fraud exclusion
will be applicable to the claim for coverage under company-reimbursement coverage (Side B), in
addition to applying to the claims of the individual insureds (Side A).
.
Presumptive Indemnification.
v.
D&O policies tend to presume that in all circumstances where permissible the company will
indemnify the insured persons
vi. Settlement. Does the insurer have the right to settle a claim against insured persons without the
written consent of the insured? If the insured withholds consent, does the insurer has the power to
tender the amount of money it was prepared to offer in settlement and walk away; this is known as a
“hammer” clause. Though many insureds object to hammer clauses, the existence of the clause may
mitigate the risk that a carrier would seek reimbursement of settlement amounts, inasmuch as it can
tender the amount it believes is appropriate in settlement and cut off its obligations.
a. Mode and Form of the Insurance
v.
Written in employment agreement, corporate resolutions, bylaws, or even statute (DE corporate law
provides presumptively that corporations indemnify officers and directors.)
vi. Indemnifying Ds & Os is not considered “waste” in the derivative suit context.
vii. Insurer does not have a duty to defend explicitly, but in practice advances defense costs.
viii. Mandatory Indemnity:
0. In all circumstances, except in violation of the positive law, the corporation pays out of
corporate treasury to defend D&O and pay costs and judgments
ix.
Permissive Indemnity
0. Corporation may indemnify
III.
Fidelity Insurance
a. Basics
i. Companies purchase fidelity-insurance policies to cover them against the risk of loss from employee
dishonesty.
ii. Fidelity coverage generally is divided into two types:
1. financial fidelity, which covers banks and other financial institutions,
2. and commercial fidelity (or commercial crime coverage), which covers other types of
businesses.
iii. On the financial-fidelity side, there is significant standardization of policy forms;
iv. on commercial fidelity, though the policy language often springs from the Surety Association of
America or the Insurance Services Office, there is less standardization in the wordings
b. Commercial Fidelity:
i. Generally speaking, two key issues are presented in any commercial fidelity claim: is the misconduct
covered and, if so, how much does the policy pay for.
ii. The first question typically involves whether the employee acted with “manifest intent” to benefit
himself (or someone else) and to harm its employer.
c. Manifest Intent/ Causation
i. Hanson - trial judge instructed jury that “a person acts with an intent to achieve a particular result”
either when the person wants to achieve the result or when “the person knows the particular result is
substantially certain to follow from his or her conduct. (essentially equates manifest intent with
recklessness).
ii. Facts: manager of the rendering department at a meat processing company (insured) failed to notify
employer that its main supplier of animal products was overstating the quality of its deliveries. Further,
manager doctored inventory records to hide the poor quality of the deliveries after supplier threatened to
discontinue its business relationship w/ the insured. Insurer that manager did not intend to harm
employer, but rather tried to avoid losing a major supplier. Held: A secret intent is of no consequence.
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This is consistent with the language of the policy requiring a manifest intent, as the word ‘manifest’
means apparent or obvious.”
Insurance Company Duties
I.
Duty to Settle and Third Party Bad Faith
a. Failure of carrier to settle the case reasonable = “third party bad faith
b. Policyholder Settlement/ Assignment
1. Implied covenant of good faith & fair dealing in every contract  duty to settle. Where there is great
risk of a recovery beyond the policy limits, good faith requires insurer to not refuse to settle.
Comunale
a. Carrier did not conduct an adequate factual investigation and therefore did not make the
decision to not pay reasonably.
b. If carrier denies coverage based on contract interpretation  remember ambiguities are strictly
construed against the carrier
2. To recover in an action against insurer for breach of the duty to settle, the insured must prove that
a reasonable insurer would have settled w/in the policy limits. Comunale
3. When an insurer breaches its insurance contract by a bad faith refusal to settle a case, the insurer
must also pay for other [compensatory] damages that it knew or should have known the insured
would incur b/c of the insurer’s bad faith conduct.
4. Determination of Unreasonableness of Failure to Pay
a. Is the answer not likely to succeed and therefore frivolous? → Could be bad faith.
b. Is the defense likely to win and therefore paying is not reasonable? → not bad faith
c. Is the company making a blanket decision to not pay claims? → Bad faith.
c. Duty To Settle: Assume P asks for $250k in prayer for damages. $100k policy limit.
i. P says: we’ll settle claim for $80k today.
ii. How do you evaluate this settlement offer?
iii. Expected value calculation –
1. What is P’s likelihood of success (60%). i.e., 40% insurer pays nothing.
2. .6 x $250,000 (prayer for damages) = $150,000
a. It’s worth taking the settlement b/c $150k > $80
iv. Breach this duty by not looking at the right facts or if you’re interpretation of coverage is
unreasonable.
d. NY Unfair Claims Settlement Practices Act: Any of the following acts by an insurers, if committed w/o just
cause and performed enough times to prove a general business practice, shall constituted unfair claim
settlement practices:
1. knowingly misrepresenting pertinent facts/policy provisions relating to coverage
2. failing to acknowledge pertinent communications as to claims
3. not even trying, in good faith, to reach prompt, fair, and equitable settlements of claims submitted in
which liability has become reasonably clear
4. forcing policyholders to file suits to recover amounts due under its policies by offering substantially
less than the amounts ultimately recovered in suits brought by them
e. Duty to Cooperate:
1. Reciprocal to the insurer’s duty to defend and indemnify is the insured’s duty to cooperate w/ their
insurer in the management of the claim.
2. Insurer does not breach its duty to insured by by contesting coverage (i.e., by filing a declaratory
action to determine whether insured’s claim is covered). St. Paul
a. Insured does not breach its duty to cooperate with the insurer by agreeing to a settlement before
waiting for the coverage action to be decided. Id. (insured agreed to settlement that relieved insured
of personal responsibility and confessing settlement amount 2x policy limits before coverage action,
field by insurer, was being decided)
f. The Right to Settle:
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i. Insured doesn’t breach its duty to cooperate by agreeing to settlement before waiting for
coverage action to be decided.
1. St. Paul: Insured does not breach its duty to cooperate with the insurer by agreeing to a
settlement before waiting for the coverage action to be decided. Id. (insured agreed to
settlement that relieved insured of personal responsibility and confessing settlement
amount 2x policy limits before coverage action, field by insurer, was being decided)
II.
First-Party Bad Faith
a. Basics
i. The unreasonable failure to pay
b. Unreasonable
i. Means that the IC did not conduct an adequate factual investigation and therefore did not make the
decision to not pay reasonably.
c. Consider contract interpretation in evaluation of reasonableness
i.  Ambiguities strictly construed against the IC.
d. Determination of Reasonableness of Failure to Pay:
i. Is the answer not likely to succeed and therefore frivolous?  Could be bad faith.
ii. Is the defense likely to win and therefore paying is not reasonable?  not bad faith
iii. Is the company making a blanket decision to not pay claims?  Bad faith.
e. Policy Behind Bad Faith
i. The purpose of first party bad faith is to encourage insurance companies to perform on their contracts.
ii. If the insurance company in fact had no obligation to perform, some states believe that there is no
circumstance under which the company can commit bad faith.
iii. Mayerson disagrees, finding that just b/c a carrier has a defense does not give them license to act in bad
faith.
III.
Performance of the Duty to Defend/Conflicts of Interests
a. Obligations of an Insurance Company when PH is Sued
i. If any one complaint allegation overlaps with the policy language, then DTD.
ii. If at the time the IC assumes control they could have reasonably predicted (based on facts known to it),
that there was the possibility of an outcome that would be outside of coverage, it must alert PH.
iii. It is not bad faith for IC to not tell PH an alternate ground for coverage.
iv. Waiver:
1. IC MUST tell PH based on universe of facts that there are covered AND uncovered claims and
IC will deny duty to indemnify on a basis outside of coverage
2. If IC does not alert the policy holder, the insurance company cannot deny coverage.
b. Reservation of Rights
i. PH must send IC notice of suit.
ii. IC says potentially covered claim and hires attorney.
iii. If verdict outside of coverage, then insurance company reserves right to assert application of exclusion.
 IC should ID grounds for denial to PH.
iv. If IC identifies known grounds, it will not be held to have waived those grounds for defense or in
estoppel jurisdiction, the PH cannot reasonably rely on the carriers not asserting these defenses.
v. Unknown Ground:
1. Carriers can rely on later discovered facts in order to deny coverage if a reasonable investigation
was conducted.
2. However, IC should timely assert newly discovered facts and their right to assert application of
exclusion AND update the reservation of rights letter.
vi. Non-Waiver Agreements:
1. IC informs PH to not understand anything they say as a concession that coverage applies.
2. Mayerson things there is no difference bw this and a coverage agreement.
c. Conflict Context
i. PH wants to either (1) win; or (2) lost on a ground that is covered.
ii. IC wants to either (1) win; or (2) lose on a ground that is not covered.
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iii. TP wants to (1) win
d. Provision of Independent Counsel
i. Also called the “cumis” rule  when there is a conflict of interest b/w PH and IC on factual
development in an underlying case, such that depending on factual development there will be coverage
or not, then the IC still pays to defend PH but cannot control the defense.
ii. Separation b/w pay and control might incentivize PH to not exercise reasonable restraint.
iii. Also, there is the issue of loyalty and privity….is just the PH the client or is it the PH and IC?
iv. You’re also allowed to have billing guidelines  firms were excessively billing ICs. However, this can
be too controlling  IC has duty to pay, not control defense; it constrains independent judgment of
counsel.
v. Most courts find billing guidelines fine as long as they don’t interfere w/ independent judgment of
defense counsel.
vi. Variations on Rule:
1. IC picks 5 attorneys, PH picks which one she wants
2. IC picks and instructs attorney but attorney has heightened ethical duties.
e. Policy Holder Settlement  Equal Consideration Rule
i. The carrier has to give as much consideration to the interest of its insured as it does its own
money.
f. No policy limits rule: insurer cannot consider the policy limits in analyzing whether case should be settled.
Insurance Regulation
I.
How Insurance Regulation Works
a. Structure
i. Insurance Commissioner
1. Appointed by governor or elected (note the political nature of this.*)
2. In charge of the admitted market, which is insurers who sell insurance in the state and have gone
through the requisite regulatory approval to sell the contract
3. Oversees intermediaries
a. Brokers: oversees their licensing and continuing education requirements
b. Claims Adjusters: helps w/ submission of claim of loss to IC
b. The Admitted Market
i. Regulates terms, prices, and capital requirements.
ii. Has access to the guaranty fund (similar in nature to the FDIC)
1. Every insurer charged a fee that goes into this fund and acts as a backstop in the case of
insolvency
2. All admitted market participants must pay into guarantee fund.
iii. If you are not in the admitted market, you’re in the “surplus lines market” in order to sell insurance in a
state.
iv. Corporations generally cannot collect from the guaranty fund.
II.
Rate Regulation
a. Types of Rate Regulation—
i. Prior Approval category
1. (a) require prior approval before rates can be used
2. (b) require prior approval, but deem rates approved if regulator takes no action
3. (c) state-made rate system (Mass.)
b. Conditional Prior Approval Category
i. (a) require prior approval under specified conditions
ii. (b) flex ratings laws (require prior approval only for rate changes in excess of a certain percentage)
c. Other
i. use-and-file laws
ii. rate-filing-only laws
iii. no rate filing/ no rate approval requirements
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d. Regulation of Residual Market Rates
i. Approve rates that don’t crowd out voluntary market
III.
Surplus Lines Insurance
a. Basics
i. Are outside the admitted market and generally cover non-standard or unusual risks that make it not
worth the insurer joining the admitted market in the particular state.
ii. A surplus lines insurer is regulated in its state of domicile.
iii. Their intermediaries are regulated by insurance commissioners from other states.
b. Issues of Insolvency
i. Surplus lines carriers do not pay into the guaranty fund and therefore have no access to it.
ii. In order to insure adequate capitalization, courts can have a pre-answer bond requirement, where the
surplus lines IC has to deposit a security equal to the maximum amount of recovery they would need
before they can file an answer to a suit.
iii. No posting = default judgment for plaintiff.
c. Estate Bankruptcy Process
i. There is no federal banker protection for insurers as insurance is a state law concern.
ii. When an insurer is about to be insolvent, the Insurance Commissioner brings an action in local court to
appoint a receiver.
iii. When the IC is in receivership:
1. All litigation is stayed
2. All claim payments are supervised by receiver
3. The receiver marshals assets (most importantly, reinsurance receivables).
4. Then the IC goes through a claims process.
d. White List
i. This is a list of surplus lines carriers that a broker can facilitate the purchase of insurance from without
asking for special regulatory exemption
ii. Do not need to post pre-answer bond.
iii. This does undermine the admitted market somewhat, but it is socially useful for the protection of less
common risks.
e. Residual Market
i. This is conducted through an assigned risk plan where PH are assigned to different carriers so that the
“bad risks” are spread throughout the market rather than being stuck with one carrier.
ii. There is a “joint underwriting association” where shares are owned by admitted carriers in proportion to
market share, capitalization, or some other facture.
IV.
Federal Regulation of Insurance
a. Insurance is Inherently Local
i. Insurance is not commerce within the commerce clause.
ii. Congress has no power to regulate.
iii. However, in Southeastern Underwriters (1944) the SC found that Congress could pass laws that affect
the insurance industry.
b. McCarran Ferguson Act
i. No federal law will be interpreted to supersede or override state laws regulating insurance.
ii. This is “reverse preemption” because federal laws generally do superseded state laws.
c. When Federal Law Is Involved
i. The chief role of federal regulation in insurance today is to facilitate international trade in the product of
insurance.
Reinsurance
I.
Purpose of Reinsurance
a. Basics
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i. Insurance companies purchase reinsurance to reduce their exposure to loss by passing that exposure
along.
ii. They “transfer the risk” to a reinsurer or a group of reinsurers.”
iii. Helps IC’s have more capital for more clients  for example in the U.S., most states permit an insurer
to only insure policies with a maximum limit of 10% of their net worth unless those policies are
reinsured.
b. Risk Transfer
i. Insurer can insure with higher limits than it otherwise would.
ii. Can make an insurance company’s results more predictable by absorbing the larger losses and reducing
the amount of capital needed to provide coverage.
II.
Types of Reinsurance
a. Proportional
i. This includes “quota share” and “surplus reinsurance.”
ii. It involves one or more reinsurers taking a stated percent share of each policy that an insurer writes.
iii. The reinsurer will receive that stated percentage of each dollar of premiums and will pay that
percentage of each dollar of losses.
iv. The reinsurer will allow a ceding commission to the insurer to cover initial costs incurred by the insurer
(marketing, underwriting, claims, etc.)
v. This allows insurer to retain more capital than it is capable of producing.
vi. Reinsurer is essentially a joint venture w/ cedent at a fixed percentage (e.g. pays 25 c on every dollar of
loss).
b. Excess of Loss
i. The reinsurer only responds if the loss suffered by the insurer exceeds a certain amount (the “retention”
or “priority”).
c. “Captive Insurer”
i. Sometimes captive companies refuse to pay parent companies so that they can file claims against
reinsurers.
III.
Reinsurance Contracts
There is no standard form to a reinsurance contract, but there are two basic types used and adapted to meet the
individual insurers’ requirements.
a. Treaty:
i. This is a broad agreement covering some portion of a particular class of business.
1. Whole sale basis
2. E.g. covers entire line or portion of business (all GM’s cards in VA).
ii. Can be written on a “continuous” or “term” basis.
1. Continuous: continues indefinitely but generally has a notice period whereby either party can
give its intent to cancel or amend the treaty within 90 days.
2. Term agreement: has a built-in expiration date.
iii. Usually purchased by a senior executive at an insurance company.
b. Facultative:
i. This covers individual underlying policies; written on a policy-specific basis
1. Retail basis: covers individual and underlying policies; written on a policy specific basis.
ii. Terms and conditions are agreed upon in each individual contract.
iii. Can be written on a quota-share or excess of loss basis.
iv. Commonly used for large or unusual risks not fitting w/in standard reinsurance treaties due to their
exclusions.
v. Usually purchased by the underwriter who underwrote the original insurance policy.
c. Clauses in Reinsurance Ks
i. XPL (Excess of Policy Limits Clause)
1. If an IC, through unreasonable failure to settle a tort case, has ended up paying in excess of
policy limits, it can reinsure excess of policy limits through an XPL Clause (excess of policy
limits clause).
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ii. XCO Clause (Extra Contractual Obligation Clause)
1. If an insurer is unable to recover on unreasonable failure to pay and the PH sues for
performance and additional damages (including punitive), then the insurer can access its
reinsurer if there is an XCO clause.
iii. Claims Control Clause
1. If a reinsurer does not want to get stuck with whatever liability the insurer gets, the reinsurer
can have a claims control clause in the insurance K to control this somewhat.
iv. Cut-Through Clause
1. If the cedent is insolvent, there can be a cut through clause where PH can sue reinsurer
directly, though it does not have privity of K.
IV.
Duties at Contract
a. Information enforcing rule
i. There is a duty of utmost good faith b/w insurer and reinsurer
ii. Even if reinsurer does not ask, the cedent has an affirmative duty to alert the reinsurer to facts that
might be material.
b. Ex Gratia Payments
Reinsurers have the ability to refuse to cover cedent if reinsurer determines that the cedent was making ex
gratia payments which were outside of the cedent’s obligation.
i. If a PH threatens IC w/ lawsuit and IC pays up, the reinsurer cannot pay the IC if the IC paid on a basis
not within the reinsurer’s obligation to cover. No trigger.
ii. The reinsurer will judge the merits of the contract b/w PH an IC  not K w/ IC.
c. Follow the Settlements Provisions
Some contracts have this provisions, where if the cedent makes a good faith and appropriate payment to a
policy holder, it will be deemed w/in coverage and the reinsurer cannot disclaim on ground of ex gratia.
i. There might be another type of exclusion or limiting provision in K.
ii. But RI cannot say no obligation to pay due to EXP.
d. Follow the Fortunes Provisions
This is distinct from FTS and deals with underwriting msitakes.
i. If cedent sells a policy and does not realize the PH has operations in a certain area, yet a claim arises
out of that operation, the IC cannot not pay b/c it didn’t know if the K on its face otherwise applies.
ii. It is true that these additional operations were not included in underwriting considerations, but the IC is
stuck with it.
iii. Similarly, when IC buys RI, the RI did not know about the PH other operations.
iv. RI is also stuck paying.
v. This does not apply when PH makes misrepresentations though.
vi. If there is NOT a FTF clause, RI can argue it does not have to pay because IC did not report other
operations and therefore breached its duty of utmost good faith.
V.
Conflict Resolution in Reinsurance
a. Settlement
i. Rarely settled in court  usually there is an arbitration clause
ii. Cedent picks someone, reinsurer picks someone, and either or both agree on a chairperson
iii. The people are picked according to a qualifications clause  chair is rarely a “market man.”
iv. Arbitrators decide on a “reasonable award.”
b. Challenging Arbitration
i. It is challengeable in court, but only for wild abuse.
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